Chinese HR coil exports to come under pressure in 2017

Nick Edstrom - 17 March 2017

Chinese export steel prices have come under sustained downward pressure from slower demand from overseas buyers. Strong buying from traders has lifted Chinese domestic prices above export prices on a FOB basis, with local sources indicating a 30kt shipment of foreign-origin billet was delivered to Tianjin this week. In the flat steel market, CRU lowered its assessment of Chinese HR coil by $8 /t to $490 /t FOB Tianjin on Thursday 16 March, while Q235 5.75mm HR coil was assessed at RMB3,650 /t ex-warehouse in Shanghai (including 17% VAT).

China's HR coil exports are expected to decline this year by 8% if domestic demand remains as robust as last year, as Chinese mills are preferring to sell to the domestic market for better profit margins. Meanwhile, lower-priced cargoes from other countries are suppressing regional demand for Chinese HR coil exports.

CRU forecasts that China's HR coil net exports will slip to about 12.3 M t this year, while its HR coil production and apparent consumption are both forecast to drop by 1% from 2016. China exported 13.97 M t of HR coil in 2016, 1.5% lower year-on-year, according to Chinese customs statistics.

Chinese HRC coil production, apparent consumption and export forecasts

NE Chart 1

Rising competition in China's main export markets

Among China's top export destinations, South Korea's demand is likely to stay stable in 2017, but exports to Vietnam might be replaced to a certain extent by cheaper coils from overseas rivals and low-cost alternatives such as HR strip.

In 2016, China exported around 3 M t of HR coil to South Korea, almost on par with that of 2015. The volume is likely to stay around the same level in 2017 as most Korean customers signed long-term supply contracts with Chinese mills like Benxi Steel and Anshan Iron & Steel.

Vietnam - a price-sensitive market - imported 4.2 M t of HR coil from China in 2016, surging by 30% on the year and became the largest HR coil export destination for China. Its import volume from China, however, will come under downward pressure due to cheaper coils from Russia, India and Brazil. The looming launch of Formosa Ha Tinh Steel is also expected to feed part of the local demand in Vietnam and edge out some Chinese supplies.

In March, offers for SAE grade HR coil from India remained about $20 /t cheaper than those of Chinese mills, and even some Chinese traders started to export Indian and Russian-origin coils to Vietnam.

Both SS400 and SAE (1006-1008) were China's key HR coil export grades over the past few years, with the former chiefly applied in machinery and construction industries while the latter consumed by pipe-makers or re-rollers. In most cases, Chinese mills requested for around $10-20 /t quality premium for SAE grade coil against SS400 coil, and the premium may narrow to zero (or negative) during market downturns or expand to $30-40 /t contrariwise.
The widening premium between HR strip and HR coil incentivised some pipe-makers in Vietnam to buy HR strip last year, and the situation may persist if the cost advantage continues this year.

Since the end of 2016, when SS400 HR coil was priced at about $40 /t above HR strip, the premium has narrowed to $25-30/t in the week beginning 10 March.

More trade barriers to restrain Chinese HR coil exports

In 2016, four countries or regions including India, European Union, Turkey and Brazil imposed antidumping/countervailing duties on Chinese HR coil/sheet, which would keep blocking Chinese HR coil exports to those regions this year.

Meanwhile, the US's antidumping probe into Vietnam-origin HDG coils also caused concern, as restrictions on Chinese-origin substrates could suppress HR coil demand from Vietnamese re-rollers, which have been an export market for Chinese HR coils, and SAE grade material in particular.

NE Chart 2

Chinese mills may reduce export allocations in 2017

Domestic drivers are also expected to encourage Chinese mills to upgrade their product mix while abolishing ineffective capacities. Major Chinese mills are inclined to produce more high-value added products used in automobile and home appliance industries.

Benxi Iron & Steel (Benxi Steel), the top SAE grade HR coil exporter in China, launched a 2.2 Mt/y cold rolling mill and 450 Kt/y hot-dip galvanizing line on a trial basis at the end of last year. The mill is therefore expected to export less SAE grade HR coil this year as it will require more material for its own production.

Reflecting its reduced supply to the export market, Benxi Steel has cut back on its weekly allocations to the export market: it offered 20-35Kt of HR coil every week to the export market after the Chinese New Year Holidays, compared with 30-40Kt in the past.

From January, Benxi also slashed the proportion of SAE grade HR coil in its weekly export allocations to 20% from 50% in the past.

Other major Chinese exporting mills like Shagang, Rizhao Iron & Steel, Guofeng Iron & Steel, Xinnyu Iron & Steel, Anshan Iron & Steel and Magang have not revealed any plans to cut HR coil exports this year, but most of them are inclined to sell domestically rather than export this year if domestic market remains as robust as last year.

As of 9 March, margins over variable costs for Chinese HR coil exports averaged around $59 /t, according to CRU calculations. Profits for domestic sales were substantially stronger at between RMB600-700 /t.

For more information on CRU's China Steel Service follow this link. If you would like more information on the wider range of steel and steel raw materials market analysis and forecasting services available from CRU, please email steel@crugroup.com.


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Author:
 

Edstrom-75-2Nick Edstrom | Head of Prices
Nick is Head of Prices at CRU, and is involved in various aspects of index development and promotion across the company.

Nick Edström joined CRU in 2016 from Argus Media, where he established Argus's iron ore, ferrous scrap and steel prices business.
He previously worked at Platts and Steel Business Briefing as European Steel Editor. He holds a first class degree in Modern Languages from Kings College London.  

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