China's steel profit margins have narrowed further in late May on higher feedstock costs, with some mills now operating at a loss.
"Our margins have narrowed a lot since iron ore prices started shooting up, now only at about one third of the levels earlier this year," a Tangshan mill official said.
Seaborne 62pc iron ore prices rose above the $100/dry metric tonne (dmt) cfr China level in mid-May, after breaching the $90/dmt level in early April and $80/dmt level in late January following a dam accident in Brazil. Tight supply of met coke in China has also sent these prices higher.
Domestic prices for 62 CSR met coke have risen to 2,250 yuan/t ($326/t) and 65 CSR at Yn2,320/t today from Yn1,950/t and Yn2,000/t, respectively, in mid-April when coke plants were operating near break-even levels. Since then, Chinese coke makers have been able to grab back margins at the expense of mills.
Gross profit margins remain wider for rebar than for hot-rolled coil (HRC), with rebar ranging 200-300 yuan/t ($29-43/t) and HRC at Yn100-200/t, an Argus survey of mills found.
A Shandong mill said its gross profits have been cut in half by price increases for iron ore and met coke, with steel products profits at Yn200-300/t, down by Yn200-300/t earlier.
Domestic steel prices have not been able to follow iron ore prices higher in the second half of May, and mills see more downside risk for steel prices as the slower construction season takes hold in June. Mills accelerated ex-works price cuts this week, with Jiangsu mills cutting rebar prices by Yn40/t to Yn4,120/t ex-works. This price is above traders' offers at Yn3,990/t ex-warehouse in Shanghai and does not take into account any rebates that mills are paying agents to make up for spot market declines.
"If prices kept falling and iron ore prices kept rising, mills might be pushed to cut production," an east China mill official said.
Operating margins disappear
The surveyed gross profit margin estimates do not include operating and capital costs. A northeast China mill said its gross profits for rebar have fallen to Yn200-300/t, but it is running at a loss with operating costs included.
A Tangshan mill has gross margins of around Yn200/t, but its operating profit "is close to the cost line after these last few days of steel price declines," an official at the mill said. Its billet gross margin is only slightly higher than Yn200/t. "This is common in the Tangshan area. Maybe some small steel mills have better profits, but we are feeling under pressure now. We will be more cautious about purchasing iron ore."
Some mills' cost estimates are not fully accounting for the latest price increases. A north China mill has gross profits of Yn100-300/t across products but that is using April iron ore inventory, "so we count the cost basis on April iron ore prices. But the situation will be different in June. We will start using higher-cost iron ore and will lose money if the steel price is stable or goes down more."
Other profit survey responses:
- HRC gross profit around Yn100/t, a Hebei mill
- HRC gross profit below Yn200/t, a north China mill
- HRC margins estimated at above Yn200/t and rebar margins above Yn300/t, a trading firm analyst
- Rebar gross profit fell to Yn200-300/t from iron ore price increases, a north China mill
- Rebar profits near Yn600/t with iron ore purchases in March, a south China mill
- Rebar gross profit at 300-400/t, a south China mill
- Billet gross profit at Yn200-300/t, a north China mill
- Rebar gross margin at Yn200-300/t, a large east China mill
- Wire rod gross profit at Yn200-300/t, a north China mill
- Wire rod gross profit at around Yn300/t, HRC above Yn100/t, and a competing Hebei mill's rebar at Yn400/t, a Hebei mill
