High input costs to crimp Chinese steel mills’ Q2 margins

Based on the data from China’s National Bureau of Statistics, the total profits China’s ferrous smelting and processing industry achieved during April-June last year reached Yuan 107.8 billion ($15.6 billion), Mysteel Global calculates, which was a sizzling 67.3% increase on profits compared with Q2 2017, but no one expects history to repeat itself this year.

“The growth of steel prices cannot catch up with the growth of iron ore prices in the second quarter. This is a major factor threatening to reduce the mills’ profitability,” a Shanghai-based market watcher remarked.

Significantly, the slower growth in prices of finished steel than in those of iron ore emerged in April when the domestic steel market should have enjoyed a seasonal peak, Mysteel Global notes.

For example, the national average benchmark price of HRB 400 20mm dia rebar last month increased by a mediocre 4.1% from the average last December while the average 62% grade Australian iron ore fines pricing index surged by 33.8% during the period, according to Mysteel’s database.

As of May 29, the benchmark iron ore price was hovering at a five-year peak of $104.5/dmt CFR Qingdao, or up $11/dmt on month, while the rebar price had lost Yuan 72/t on month to Yuan 4,161/t including 13% VAT during the period, according to Mysteel’s daily price tracker.

The 91 surveyed integrated steel mills Mysteel canvasses across the country saw their rebar margins increase by Yuan 155/t from March to Yuan 477/t for April, but it was still a Yuan 131/t contraction from April 2018, according to Mysteel’s monthly survey, which clearly illustrated that Chinese mills have been making money but not as much as what they achieved this time last year.

On the latest NBS data, over January-April this year China’s domestic ferrous smelting and processing industry posted a substantial 28% year-on-year decline in gross profit though there was some consolation, as the decline over the first four months was not as dramatic as the 44.5% tumble witnessed over January-March, thanks to the general strengthening in domestic steel prices throughout April, as reported.

Moreover, to explain their bleak assessment of the mills’ fortunes this quarter, market watchers merely point to the fact that the retreat in steel demand from the beginning of this month compared with last month’s peak has caused domestic steel prices to stumble – with the approach of the rainy season across much of China in June are expected to definitely dampen demand even further.

“Iron ore prices are unlikely to slump suddenly given the supply tightness major overseas miners have disclosed so far, while at the same time, the domestic mills have ramped up steel production, providing one more reason for their raw materials suppliers to keep their offer prices high,” an iron ore pundit based in Beijing warned.

Mysteel’s weekly study showed that the capacity utilization rate for making rebar among the 137 long steelmakers rose to 83.6% as of May 22, the highest since Mysteel commenced this run-rate study in February 2015.

Written by Venus Wang, wangyi@mysteel.com 

Edited by Russ McCulloch, russ.mcculloch@mysteel.com