The surge in ex-China steel prices has prompted the global ferrous market to focus away from China to demand drivers in Europe and the US, even as the world’s top importer and exporter of commodities has clawed its way back into headlines through a series of government statements on the price hikes.
The focus away from China is unusual for markets that have grown to see the country as a trendsetter. The shift in spotlight has come on record high steel prices in US and Europe.
Gains in US steel prices have been triggered by sustained supply constraints following output reductions from Covid-19 shutdowns last year and a lack of imports since the fourth quarter of 2020. As demand recovered, suppliers failed to cope and that lengthened lead times for deliveries. In Europe, similar factors have played out and bolstered prices to record levels. The spread between Europe and Chinese HRC prices stand at $500/t, the highest on record. The US-China HRC price spread is even wider at $770/t. US HRC prices are double the levels in China at this point.
“The developments of the last nine months or so have probably left many confused. Earlier, all you needed to do to understand the steel markets was turn to China but that is no longer the case,” said Joel Parsons, fund manager at Drakewood Capital Management.
The price inflation in global commodities has not left China unscathed, even prompting the Chinese government to reiterate concerns about the record rise in steel prices on multiple occasions. To control gains in prices, China cancelled export rebates on steel from 1 May, a move that many Chinese market participants described as a way to tame steel and iron ore prices.
Every time a statement from the Chinese government suggested a “cooling off” measure, iron ore and steel markets responded sharply. “However, Chinese steel needs to be priced against the world prices,” Parsons added. The shift in market drivers away from China was reflected in the opposite price movements seen in domestic China and export steel prices on 2 June, with Chinese sellers keeping offers firm to take advantage of the supply tightness outside even as domestic steel prices retreated. It would be early to label this a trend though, as domestic steel prices are also likely to continue finding support from international price levels and sustained domestic demand.
Domestic steel prices in China averaged 5,894.74 yuan/t last month, up by 70pc on the year. Fob China HRC prices averaged $961.84/t, up by 133.8pc on year. It remains to be seen if the rebate removals have hindered steel exports, with latest data yet to be released.
Where there’s steel, there’s iron ore
Since 2019, supply tightness has been a constant factor supporting iron ore prices. This year, many in the market have flagged record steel production from China as a key support to prices, with some arguing even more so than supply side pressures.
Brazilian iron ore exports to China have risen on the year in January-April, though shipments from Australia have dropped. Parsons highlighted that but for the supply disruptions of previous years, iron ore prices would be at much lower levels today. Chinese iron ore buyers are already flagging record steel prices ex-China as a factor supporting cfr China prices, with sellers presented with the option to sell cargoes outside unlike last year when Covid-19 augmented reliance on China. The supply side’s response to the high iron ore prices has been muted despite prices seeing a good run since 2019, according to Parsons.
“Big capital projects come with several moving parts and there seems to be risk aversion to capital investments despite the iron ore rally and potential for significant returns over the long term,” he said.
Parsons expects supply response from the junior miners in Australia.
China has also ramped up conversation about intensifying supply self-sufficiency through domestic and overseas production and higher usage of ferrous scrap and metallics to meet its carbon neutrality goals.
The Simandou iron ore project in Guinea developed by the Winning Consortium Simandou has gained particular market interest over the last few years among buyers and sellers. “It would be logical for this material to be sold into closer markets in Europe and the Middle East, but even in this case there will be clear strategic benefits for China,” Parsons said. China also opened ferrous scrap imports earlier this year and aims to hit 300mn t of domestic production by 2025 to enhance green steel production.
The fluctuations due to policy announcements and statements from government officials underline the rising risks for commodity traders, who increasingly need to trade policy than fundamentals. Price risk management tools remain critical for participants along the steel value chain to hedge exposure. The iron ore market is ahead of steel and coking coal when it comes to usage of index-linked pricing and derivative tools. Covid-19 has shown how black swan events can affect contract negotiations and fulfilment and steel markets in Asia and Europe have seen a direct impact in recent times. Global exchanges have launched steel derivatives in line with rising needs for risk management among participants. Parsons conceded that liquidity remains an issue for them, though “their value should become clearer now”. Steel market participants have also been looking at usage of index-linked pricing that address a critical point of negotiations while allowing the finer details of negotiations to the expertise of negotiators.
Argus assesses more than 250 iron ore, coking coal, steel and ferrous scrap prices in the Argus Ferrous Markets service.
Find out more