Baoshan Iron & Steel Typifies A Market With A Million Variables

There are a lot of factors at play in the Asian steel market, the largest of which is the direction of China’s steel industry.

Current data suggests demand is dropping. Reuters reports Chinese steel futures fell for the second straight session on Monday to hit the lowest in nearly seven months. “Enquiries are weak, while mills have shipped their products from north to south, bringing more pressure to market in some warmer cities,” the publication quotes a Shanghai trader as saying.

Billet and rebar prices are said to have weakened and dragged down domestic iron ore futures. The Dalian May quotation fell for the fourth straight session this week while iron ore stockpiles at 34 big Chinese ports are said to have risen 1.19 million metric tons to 84.91 million tons by last Friday from the previous week.

Sounds negative, doesn’t it? But is it?

Looking back historically, December/January are typically the low points for steel demand and prices as construction is impacted by cold weather and consumers run down inventories ahead of the Chinese New Year, which will start on Jan. 31 this year.

Baoshan Iron & Steel clearly does not see the need to chase the market down. According to the Taipei Times, China’s largest steelmaker decided to raise the prices of its major products, including hot-rolled steel, for this month’s contracts by an average of 50 Chinese yuan (US$8.20) per ton, after it left prices unchanged in the period running from October through last month.

Throw in another variable: the extent to which Beijing’s drive to cut pollution by curtailing excess steelmaking capacity and enforcing environmental standards actually impacts steel production. China’s capacity is far in excess of its actual production – steelmakers could “close capacity” yet not actually reduce production if that was the only measure being enforced.

But it would seem Beijing is serious as prices suggest atmospheric pollution is driving market behavior. Bloomberg reports the difference between iron ore fines and lump reached $20.28 per ton on Dec. 25, the most in at least two years. Mills pay a premium for lump because it can be fed directly into blast furnaces without sintering; but sintering adds to emissions levels.

India, it seems, is betting China will cut steel capacity and in the process reduce exports. Business Standard reports China is estimated to have exported 52 million tons of steel in 2013 and this is expected to decline by 11 million tons by FY15 to 41 million tons. The Indian mills, with new capacity coming on stream and a weak domestic market, see this as an opportunity to increase exports, the paper suggests.

Much will depend on China’s manufacturing sector in 2014. A recent pick-up towards the end of 2013 suggests the sector is doing well, but an appreciating currency and a Beijing-imposed cash crunch on lending could slow both exports and investment. Construction is unlikely to benefit again a mini-sugar-rush like the stimulus injected by Beijing into the economy last year, but carry-on from that will help the sector in 2014.

What This Means for Metal Buyers

Falling raw material prices will aid steel mills’ margins, coking coal prices are down and Goldman Sachs is not alone in predicting lower iron ore prices in Q2/Q3 2014 – the firm suggests an average of $108 per ton for this year.

Meanwhile, prices in the US have risen towards year-end and mills are making bullish noises about 2014. Steel demand generally is picking up, but weaker raw material costs could mitigate pressure for mills to raise prices further.

by Stuart Burns