CRU: Chinese Steel Prices Collapse

In turn that means Chinese mills are accepting low margins. By our models, the spot margin has turned negative in China. Iron ore costs have come down enormously, from above $200 /t to below $100 /t, but Chinese metallurgical coal and coke costs are still very high, and crucially in the case of coal higher than for mills outside China.

Prices and especially margins remain high outside China, but the market is softening everywhere. Even the U.S. market has come off its peak, while in Europe mills have rediscovered the need to compete for orders against imports and are lowering prices to do that.

Domestic markets in both India and Russia have recently been through a strong spell but there are signs this may be changing. Winter is coming in Russia, which normally drives a seasonal slowdown in domestic demand and a concurrent increase in interest to export. In India, supply is rising just as local buying interest is waning. In the case of both these key exporters, we may therefore see a new short-term push into international markets.

Outlook: China Should Be Able to Return to Exporting

With the agreement to move Section 232 to a set of tariff rate quotas, EU mills are looking to the USA as an outlet to absorb near-term surplus volumes. That may be successful to some extent as a release valve, but it is hard to see that a huge change will result. It is not clear that the USA has fundamentally turned towards wanting lots more imported steel, and we would note that a CO2 intensity metric is intended to be applied, though has yet to be defined.

Chinese mills are also facing a deteriorating local market, but until now the government has discouraged exporting. This may be changing. The desire to limit exports was something designed to try and maximize available supply to the domestic market at a time when China was looking to limit production to meet both environmental and commodity price control goals. But iron ore is now far below its peak, and it could be argued that the commodity price control imperative has achieved its aim. Domestic demand is also weakening rapidly and there is a reduced need to maximize local supply. Further, any export orders taken now will probably not be shipped until 2022 and so will not impact the y/y comparison of export volumes for 2021 against 2020. It is likely that the government will also want to see no y/y increase in exports in 2022, but in the early part of the year such an annual target is far away.

We therefore do not see that there are insurmountable barriers to Chinese mills exporting more steel in the short term. With prices falling to very competitive levels, it seems that the mills implicitly agree and are looking to offshore markets and the more attractive margins that they currently offer. In turn that will raise international supply at what is a seasonally weaker time in many markets. Downside price pressure looks likely.

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