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AuthorPaul Butterworth

Research Manager, Steel Raw Materials and Steel Costs View profile

CRU’s China Steel Service provides the most robust, high-frequency prices relating to the Chinese steel market available.  So much so that the steel industry has confidence in using CRU’s prices to settle steel purchases and sales contracts.  The China Steel Service provides much more than just prices; this insight sets out how you can use the information provided to forecast future price direction and pricing behaviour.

Where are we today and how did we get here?
In 2016 H1, steel prices in China rose rapidly, as stimulus measures from late-2015 began to have an impact on steel demand; at the same time, the government became increasingly vocal regarding the closure of excess and out-dated capacity.

Prices rose to very high levels in Q2 of that year.  Following a downwards correction in June, steel prices once again began to rise from October 2016 onwards – but the magnitude of the increase for sheet and long products was different.

Figure 1 shows that, in 2016 Q4, prices for sheet products lifted much more quickly than costs, whereas long product prices essentially tracked costs upwards. More recently, in 2017 Q1, long product prices have continued to rise well above costs, whereas sheet prices have pulled back and stabilised.

CRU analysis in the China Steel Service not only indicates that the price movements in the different product areas are closely linked to the respective cost competitiveness of Chinese mills, but also allows you to predict future price movements.

Figure 2, shows that, as metallurgical coal prices began to lift in the 2016 H2. Chinese coal prices were lagging and, whereas Shanxi coal had been trading at a premium of about $25 /t to seaborne coal (on a value adjusted basis), Shanxi coal began to trade at a significant discount.

This gave Chinese steel mills a distinct cost advantage versus their peers in the export market, particularly compared with mills in Japan and South Korea that are more exposed to seaborne prices.  This ensured than sheet prices were lifted by the higher costs at east Asian mills.  At this point, China was able to command strong premiums in the export market and this in turn lifted Chinese domestic prices. However, as the China Steel Service data shows, not all products’ prices are equally affected.

Contrarily, as the metallurgical coal price lifted, China was increasingly at a cost disadvantage versus scrap-based steel producers in the region, as scrap prices remained relatively low.  This meant that Chinese mills were not able to command the same price increases in the export market and scrap-based producers began to take market share.  As a result, long product price increases were lower and those Chinese mills that were able to shift production from longs to sheet products began to do so.

More recently, post-Chinese New Year 2017, demand in China has undershot expectations; high inventories of sheet products has forced Chinese prices for sheet products to fall rapidly, particularly those for CR coil and HDG.

For rebar, however, prices continued to rise, largely on the expectation of closures of induction furnaces and partly due to a perceived shortage of supply, which led to a pullback in exports.  Importantly, price data from CRU’s China Steel Service shows that domestic rebar prices had increased to unsustainable levels.  So, how can CRU’s China Steel Service help understand what will happen to prices now?

When will prices turn and what will drive this?
Figure 4 plots data from CRU’s China Steel Service and shows:

  • The costs for export rebar assuming full recovery of VAT, including a near-term forecast
  • The export price of rebar, FOB China and
  • The domestic price of rebar, del. Shanghai

There are two important takeaways from this graph:

Firstly, steelmaking costs are forecast to stabilise and fall in the next few weeks, largely driven by falling raw material prices.  Secondly, domestic rebar prices are at an unsustainable premium versus export prices.  Given demand conditions, domestic prices cannot be sustained at these levels and we believe that the export price provides a better indication of the true level of the market.

As such, our analysis indicates that:

  1. Export prices will track down to the level of costs but, importantly, domestic rebar prices will fall faster until they reach a more normal differential with export prices.  We expect this to happen sometime in May.
  2. As the domestic market deteriorates, the incentive to export material will increase and we expect more long products to be exported from China in the coming weeks.
  3. For sheet products the exuberant optimism towards end-2016 has been met with muted demand post-CNY and high levels of inventory have already started to pull prices down.
    Domestic prices have fallen to a more normal differential with export prices and these conditions are likely to see export volumes lift, if only marginally, and prices fall towards end-April but, as for rebar, only to the level of costs.
  4. Our analysis of the Chinese market, as set out in CRU’s China Steel Service, suggests that export prices are unlikely to fall much below full costs.

How CRU’s China Steel Service can be of use to you
CRU’s China Steel Service not only provides robust, high-frequency price data pertinent to the Chinese market; it also provides a regularly updated view of the costs of steel exported from China.  Costs are a major driver of price and so provide an indicator of likely price direction.  Understanding costs of Chinese steelmakers allows you to track the cost competitiveness of different product areas that links to ability to export.

The price/cost differential gives an understanding of the strength of the domestic market, a key indicator of the willingness of steel mills to export.  Comparing domestic and export prices provides insight into near-term price dynamics, but also provides another indicator of the strength, or sustainability, of the domestic market and, therefore, propensity to export.

Explore this topic with CRU

China Steel Service Team

  • John Johnson

    Chief Executive Officer, CRU China Beijing
  • Paul Butterworth

    Research Manager, Steel Raw Materials and Steel Costs London
  • Linda Lin

    Editor Shanghai
  • Susan Gao

    Head of China, Consulting Beijing
  • Kevin Bai

    Analyst Beijing