MYSTEEL: China Jan steel prices may dip on fundamentals

This month, demand for construction steel will decline due to the cold winter, while the too high prices currently may discourage the consumption of some steel for industrial use, Wang noted in his list of concerns, while some export contracts – signed at high prices – may be exposed to the risk of default by the buyers.

Besides, the lingering high steel prices may be dampening the domestic steel traders' enthusiasm for stocking up in the winter months in hopes of a revival in demand in spring, according to him. Currently, prices of major longs and flats are Yuan 634-1,267/tonne ($98.2-196.2/t) higher on year on average, he noted.

"The pandemic has been spreading in foreign countries, and new cases have popped up in China too," he explained. "Steel prices, undoubtedly at relatively high levels, will keep any interest in winter restocking at bay should the prices not adjust downward," he suggested.

Moreover, the support that high raw material prices are lending to the domestic steel prices may wane, as the supply may increase while demand for iron ore from China's steelmakers, for example, may decline for seasonal reasons.

As of December 24, the price of 62.5% Fe content Australian iron ore fines was at $165/dmt CFR China, or up $74/dmt on year, while iron ore port inventories had shrunk by only 2.3% on year, suggesting the lack of foundation and thus unsustainability of iron ore prices, he argued.

At the same time, China's finished steel output may remain high due to the rather healthy profit margins makers can earn, he predicted. By December 25, the average margin that the country's independent electric-arc-furnace mills were winning was Yuan 435/t. Such a high margin will lead to the further build-up in finished steel stocks, he predicted.

"Stocks of the five major steel products grew by 6.8% on year as of December 24, which was a sign that stocks have come to a turning point for increases, and with the Chinese New Year holiday being seven weeks ahead, stocks may build up further," Wang warned.

He acknowledged, though, that the room for domestic steel prices to decline in January may be limited. He cited the relatively good volumes of steel being exported – directly or indirectly, the good demand for flat steel, and the persistently high prices of domestic coke due to reduced availability of the feed material.  

For the whole of 2020, the average price of China's finished steel was still Yuan 63/t lower on year despite eight months of strengthening. Consequently, domestic steel mills will probably see their profitability draw level with 2019 or decline on year, he summarized.

Written by Hongmei Li, li.hongmei@mysteel.com

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