Chinese steel prices are rising and will continue to do so
into 2018
With tight supply and production expected to remain restricted, Chinese domestic steel prices are
increasing rapidly. The ‘winter heating’ cuts in China will continue to have further impact in December
and will likely continue into 2018.
Chinese heating season cuts to steel production begin to take effect
According to CRU preliminary data, Chinese crude steel production increased by 0.7% m/m in October, while
global crude steel production decreased by 9% m/m. At the same time, CISA numbers highlighted a
significant drop of 4% in finished steel production during the month, which we take to mean that stocks of
semi-finished products were being built in China in anticipation of the heating season cuts. The previously
announced production cuts in 5 steelmaking provinces have reportedly now been extended to other
provinces, although our research suggest that, overall, cuts have not been as severe as first suggested.
As supply tightened, Chinese domestic prices for rebar and HR coil increased throughout November. HR
coil prices rose by 7% m/m while the rebar price has gained a staggering 22% m/m by end-November. The
initial closures were focused on smaller blast furnaces, that have been weighted towards the production of
long products rather than flats, while at the same time some construction activity appears to have been
brought forward, which has supported demand better than initially expected. In the global market prices
were steady in early-November, nevertheless, prices are expected to increase in December to follow
Chinese prices upwards.
While Chinese prices have been rising, costs have also been increasing, partly offsetting margins. The iron
ore spot price moved back over $70 /t, CFR China, while the hard-coking coal price rose by 14% m/m, to
$200 /t, FOB Australia. Looking at scrap, the average monthly HMS 80:20 scrap price remained steady at
$309 /t, CFR Turkey. Nevertheless, Chinese steel mill EBITDA margins in the domestic market have risen to
very healthy levels of 21% and 27% for HR coil and rebar respectively and we expect data to show that
exports will have fallen.
While we have already seen some impact of the winter ‘heating season’ cuts in China, CRU expects that the
impact of the cuts will be far greater in late-December and especially into early-2018. Furthermore, it is likely
that the restart of production following the winter restrictions may not be simple; any blast furnaces that were
shut over winter, as opposed to idled, will take time to restore to full output. Therefore, the cuts will affect
steel production well into 2018. CRU also expects that raw material prices will decline, more reflecting
increased supply, which may help to support margins in the short-term
Source: CRU monitor December 2017