China's flat steelmakers are being forced to cut production as supply exceeds demand, especially for hot-dipped galvanised (HDG), unlike long products that are enjoying demand growth and wider profit margins.
Shanghai traders' hot-rolled coil (HRC) prices have been at a discount to Shanghai rebar prices for most of the past nine months, as a slowdown in auto sales and exports have pressured prices lower. Firmer construction steel demand growth and a 2017 crackdown on illegal capacity that tightened supply have kept rebar prices higher.
China's HRC capacity is estimated to have increased by nearly 30mn t/yr to 300mn t/yr through new builds and capacity swaps in 2018-19.
Shanghai HRC prices have risen by 9.6pc or 350 yuan/t ($51/t) since the beginning of the year to Yn4,000/t ex-warehouse, while Shanghai rebar prices have risen by 8.3pc or Yn310/t to Yn4,050/t ex-warehouse over the same period. Mills are reporting gross margins of around Yn400/t for rebar but only around Yn200-300/t for HRC.
Oversupply has made HDG and cold-rolled coil (CRC) margins less favourable for sellers. Restrictions on new blast furnaces have led mills to invest in output for downstream products, leading to the supply glut for HDG and CRC.
Major Chinese mills have turned to producing more HRC instead of CRC and HDG, narrowing the spreads between the products, a Shanghai-based trader said.
The weekly Shanghai CRC price fell by Yn14/t to Yn4,238/t ex-warehouse on 24 May.
Shanghai HDG was offered at Yn4,630-3,640/t ex-warehouse today.
Buyer enquiries are very thin for HDG, domestic and export HDG traders said. Downstream demand has been weak since last year, and recently has become worse, raising the need to cut production or shut down, another Chinese trader said.
HRC makes up about a fifth of China's steel exports and has accounted for some of the declines over the past few years. Malaysia's trade protection measures against CRC imports and its stalled infrastructure projects have hit Chinese exports, a trader said.
