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Chinese API prices fall whilst steel prices halt

Published by
World Pipelines,

Rystad Energy’s weekly steel and API note from Alistair Ramsay and Marina Bozkurt.

API Plate (Linepipe)

Chinese prices for API plates fell sharply caused by the zero-COVID-19 policy in China and the extreme weather conditions, depressing steel demand from the infrastructure sector. China’s zero-tolerance approach to COVID-19 infections weighs heavily on market confidence. Current offers of API plates from China are coming to the foreign markets at US$950 - 1000/t FOB for X65 non-sour grade. However, most projects for shipment this year were closed earlier, and the others are all for shipments in 2023. Some API plate mills don’t offer discounts so far. Rystad Energy expects the Chinese market will suffer in the coming months because of the economic situation. However, The Chinese authorities are taking measures to stimulate domestic demand. China targets steel production cuts in the second half of 2022 to reduce market supply. Prices should strengthen in two to three months on the back of production cuts and supported by China’s measures to bolster the economy. This also should limit the ability of Chinese exporters to affect other markets with their low prices negatively. Thus, there is no good signal except for solid demand from the shipbuilding industry for Korean and Japanese mills, so, currently, the price gap with Chinese materials is shrunk as normal. If the price level from China stabilises, Korean and Japanese mills will maintain their price level. Moreover, surging energy prices on the threat of gas supply disruptions to Japan and high prices of iron ore and coal, the two main inputs for steel production, lead to rising steelmakers’ costs.

Energy steel

Commodity grade steel prices took a breather last week and broadly stabilised following the negative trend over the past month, especially in US flat-rolled markets. The daily average hot-rolled coil (HRC) benchmark in the US fell by roughly 20% in July, narrowing the gap with European and Chinese prices, which also fell by more than 10% month-on-month. Data for the first half of this year published last week reveals that Chinese steel producers already suffered before July’s downturn.

Indeed the profit margin, defined here as total profits divided by revenue, slipped to just 1.8% during the first six months among Chinese steelmakers, down from 5.6% one year earlier. Of the 42 industries listed in Chinese statistics, only mining support services were less profitable. Absolute profits fell by 68.7%, the worst performing Chinese industry. Last year, the steel industry stood only a little below average in 24th place.

By comparison, the industry at large was at a 6.5% margin, down only modestly from 7.1% the year before, thanks to the strong and strengthening profits in steelmaking raw materials industries. Coal mining (including coking coal) ranked second from the top at 26.6%, narrowly behind the best-performing oil and gas extraction industry (34.8%), and iron ore mining was in sixth place at 15.7%. These were up from the already healthy 16.3% and 14.3% one year ago and fifth and seventh-top industries, respectively.

Clearly, the tightening squeeze affecting steel producers did influence raw materials prices. For a brief period in July, iron ore, and for that matter ferrous scrap prices – which followed iron ore rather than the international scrap trend – were joining coke in a price retreat; imported iron ore slipped under US$10/t, for example, close to the breakeven levels of miners at the wrong end of the cost curve. But unfortunately for steelmakers, raw materials suppliers tend not to suffer a profit squeeze for long, and prices have been recovering rapidly. They were back above the US$115/t levels recorded in June at the beginning of August. Ferrous scrap prices are also reviving strongly, offsetting a steady drop in coke prices, which slipped under US$300/t this week, from an average over US$350/t in July to US$400/t in June.

The diverging patterns between coke prices, which are retreating, and iron prices, which are increasing, are leading to stability in Chinese steelmaking costs, reminding Rystad Energy of a similar situation in 3Q21 when the first signs of an ‘energy crisis’, in the form of spiking coal and coke prices offset the crash in raw materials prices that resulted from Chinese government initiatives to curb steel production. Rystad Energy was not anticipating similar curbs this year – they forecast steel production will be higher than last year as detailed a few weeks back – though if coke and other energy prices turn higher in the near term, along with reviving irons, production cuts may turn out to the result with or without Chinese government intervention.

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Asia pipeline news Trends and analysis