How China’s unwritten rules are squeezing global automakers
Chinese government policies are not always written down or announced, and some are announced very late. These unwritten rules are having a major impact on costs along the steel supply chain, with automakers, in particular, feeling the squeeze. Many of these policies have a green tinge, such as the recent ban on Australian coking coal.
In a recent webinar, “Building the car of the future: The race to green steel and the automotive supply chain”, Paul Lim talked to experts in steel and battery raw materials about the Asian automotive market and the impact of decarbonization on automotive production.
Read on to get the highlights of this conversation about China’s unwritten policies, or listen to the webinar to learn more about this and other issues affecting automakers.
China bans Australian coking coal
China’s recent ban on Australian coke is a high-profile example of an unannounced policy. It caused major coking coal trade flow swings, with Russian, Mongolian and North American coal replacing Australian supplies. Steel costs rose across the globe and along the supply chain. Policy wasn’t the only driver, but it amplified supply constraints.
Chinese domestic coal supply was tight because of safety inspections at coal mines from late March. Russian railways were frozen in the first quarter of 2021 and railway capacity for coking coal was limited in the second quarter. Covid-19 disrupted shipments of North American PACC and Mongolia coking coal.
The chart above shows a correlation between coke prices and steel product prices, especially hot-rolled coil, the main substrate for automotive steel. If you’re an automaker and heavy buyer of steel, that correlation means you’re not just looking at the price of the hot-rolled coil, cold-rolled coil and steel reinforcing bar you’re buying. You’ve also got to look at the basket of raw materials and the policies affecting their supply and demand to understand your costs.
China disincentivizes steel exports
We were hearing rumors of a VAT rebate up to four months before the official announcement in late April. The rebate aimed to lower steel production and carbon emissions in China by stifling steel exports.
In early 2021, steel prices started to creep up as the VAT rebate cut was communicated through back channels until its announcement in April. There were just three days between announcement and implementation, which caused significant contract performance issues.
Steel mills were trying to price in the potential rebate cuts, causing export prices to rise. Again, China’s policies weren’t the only driver of price – high overseas prices and strong demand from Europe also drove prices up.
The market is chattering about more cuts to export rebates, including for cold-rolled coil and galvanized coil, the substrates for automotive steel. We’re also hearing talk of steel export taxes designed to stop steel outflows. If exports fell, Chinese steel mills could meet domestic demand without increasing production, therefore keeping a check on emissions from the steel production process.
China caps steel production
China’s high rate of industrial production has seen levels of pollution in major cities starting to rise again in 2021 after clearing in 2020. As a result, China is aiming to cap steel production this year. The steel production cuts this year were not openly announced to the public in many instances. Instead, steel manufacturers received verbal notifications from provincial authorities, or held closed-door conferences before private announcements were made to the relevant stakeholders such as downstream buyers.
China wasn’t entirely successful in keeping steel exports low. The large price gap between Asia and Europe and the US, as well as South America, meant that buyers were still willing to buy Chinese steel. Buyers were so desperately in need of cold-rolled coil they were willing to purchase Chinese-made cold-rolled coil and pay anti-dumping duties of 15 to 25%. That still worked out cheaper than European-made materials. Mills affected by Covid-19 had not restarted operations, and Europe saw prices as high as $1500 per metric tonnes.
China monitors paper trading accounts
There have been reports of China monitoring paper trading accounts of traders and financial institutions to limit their involvement in speculative trading. Traders were required to report their positions regularly. This was especially so when prices hit the intra-year highs in the first half of May 2021. Chinese Premier Li Keqiang then announced that commodity prices were overheated, and the state was monitoring speculative trading, hoarding of inventories and other unusual trading practices. Steel prices dropped steeply from May 12 as a result.
Why automakers should keep their eye on iron ore prices and policies
China’s official and unofficial drives towards decarbonization have created demand for high grade iron ore such as 65% FE iron ore. Understanding iron ore prices is key to understanding steel prices.
A significant tailwind for high-grade premiums is the high price of metallurgical coal and coke, both of which have been rising in China since the country banned imports of Australian coal. Higher-purity iron ores generate less slag when consumed in blast furnaces, allowing coke rates to be kept lower, while direct-charge ores such as lump and pellet also lessen the consumption of coke breeze in the sintering process. Using higher-grade iron ore feedstocks is therefore preferable for mills when coking coal prices are high.
The chart above shows the widening gap between 62% and 65% FE iron ore in 2021. Strong demand and tight supply of Brazilian high-grade iron ore fines, caused by extreme weather and logistics problems in Brazil, put a wedge between the two grades. As did strong steel margins in China for most of the year.
How is the global automotive industry adapting to China’s green agenda?
In a recent webinar, we focused on the Asian automotive market and the impact of decarbonization on automotive production, as well as how the ferrous and battery raw materials supply chains are responding to it.
Join Paul Lim and his colleagues as they discuss:
- Decarbonization and the impact on steel substrate production
- Steel price movements and government policies
- Steel price outlook
- Battery raw material price movements and outlook
- Outlook for electric vehicles and challenges for the supply chain