CRU: Snapshot of Global Steel, Raw Material Markets

China’s winter heating season production cuts officially started in mid-November and it quickly became clear that this round of production cuts was not as strict as last year. Blast furnaces in China have been running hard and the nominal utilization rates both nationwide and in Tangshan have only registered marginal drops. One consequence of the looser capacity restrictions is better-than-expected steel supply in China. As demand, especially for HRC products, has been surprisingly weak, steel prices collapsed at end-November and have since remained at low levels. The fall in steel prices has also led to a significant fall in steelmaking margins. Although profitability is slightly better for rebar producers, steelmakers overall are now far away from the 15-25 percent margins enjoyed for most of 2018 and are barely breaking even at the moment. 

Raw Materials Prices Move in Different Directions

Weaker margins have had a big effect on how steelmakers view different grades of raw materials and how they manage inventory levels. For iron ore, steelmakers have reduced inventory levels in the past month while, at the same time, they have started preferring medium- and low-grade iron ore to the extent that the low-grade discount has fallen, as cost savings became a priority over productivity optimization. This has also resulted in a falling premium for high-grade iron ore and weaker overall demand, as mills run down inventories to reduce costs. We observed a sharp fall in iron ore prices at end-November, as steel prices collapsed and it became obvious that BHP had managed to resume operations quickly after the Nov. 5 ore train derailment in Western Australia. In the past few weeks, iron ore prices have rebounded on expectations of further stimulus measures and weaker-than-expected supply, especially from Rio Tinto. For coking coal, the story has been very different. Premium hard coking coal (HCC) prices have risen as supply constraints in Australia have limited supply. However, Standard HCC has fallen on weaker Chinese demand. At the same time, the loose production cuts in China have also led to rising coke production and falling prices m/m. 

Weaker Steel Market Spreading to India

The Indian steel market has had a strong 2018 and steelmakers have been increasing imports of both coking coal and iron ore. However, in the past month, the weakness in the Chinese market has spread to India. Steel demand has weakened, and production levels have not been able to lift towards end-2018. As India is heavily dependent on imported coking coal, we expect imports to remain steady even as the market weakens. For iron ore, it is a different story. 2018 has been a record year for Indian iron ore imports, which has provided relief to Australian iron ore producers that have had a hard time selling their products to China. However, CRU has already observed signs of weakness in the months to come. Domestic supply is improving, and we are expecting domestic steel mills and iron ore producers to get closer to a price agreement that will reduce the need for imported iron ore.