China strength not offsetting global steel weakness

China's latest round of stimulus measures has supported its ferrous complex at the start of its autumn construction season.

But that strength is not turning around weakness in many overseas regions, as opposed to two years ago when China carried global markets higher.

China's state council recently reiterated policy support for the economy and its central bank freed up more cash to support credit-sensitive sectors such as real estate and auto sales.

As a result, the country's steel markets have stabilised from the onset of fall construction, accelerating the drawdown in inventories. Shanghai rebar prices have risen by 3.7pc to 3,670 yuan/t ($518/t) and hot-rolled coil (HRC) prices have risen by 3pc to Yn3,720/t since 29 August. Most Chinese steel traders are bullish ahead of China's national day holiday in early October but are less certain beyond that, when demand starts to slow ahead of the winter season.

Chinese export prices have not followed domestic prices higher, with the fob HRC price down by $3/t and the fob rebar price off by $2/t over the same period. Those price levels are freezing China's export offers out of markets rather than pulling competitors' prices higher.

Local markets pressure

Global steel prices rallied in 2017-18 on tighter supply from China's shutdown of 120mn t/yr unpermitted mills and stronger economic growth in the US, the world's largest steel importer.

China's price strength relative to competitors this year is again reducing its steel exports, which hit a six-month low in August. But there is no accompanying boost to seaborne prices, as there was during its pullback two years ago.

Weaker regional players instead are setting the tone into import hubs such as Asean, creating a negative feedback loop across ferrous markets that is so far drowning out price strength in China.

India has notably contributed to the ex-China price decline and has been extremely aggressive into key import markets.

Much of the attention recently has also been on Turkish imported scrap prices. The Argus HMS 1/2 80:20 cfr Turkey index has fallen by $52/t, or 18pc, to $240/t cfr Turkey since 1 August, its lowest level since February 2017. Low scrap costs have provided an arbitrage for rebar shipments into Singapore.

The cfr Asean rebar index has fallen by 7.5pc to $446/t cfr Singapore theoretical weight since early August, with declines this week driven by Turkish deals at $440-445/t cfr theoretical weight. Slipping Turkish scrap prices prompted a Singapore stockist to withdraw its bid for Turkish rebar this week.

India-origin HRC has been the main weight on the cfr Asean HRC index into Vietnam this month. Traders have rushed to sell SAE1006-grade coil held at Vietnamese ports to cut losses on material procured at higher levels from mills. Offers for India-origin coil at $457-460/t cfr Vietnam are much lower than those from China at $470/t cfr, Japan at $480/t cfr, South Korea at $475/t and Turkey at $485/t cfr this week.

Domestic markets are also bleeding weakness into seaborne trade through semi-finished steels.

Indian mills over the past three months have exported more flat and semi-finished steel products to north and southeast Asia at competitive prices. An Indian mill sold billet at $410/t cfr Thailand early this month. Turkish billet is also offered at $410/t cfr southeast Asia. Taiwanese mill scrap buyers expect billet prices to reach Taiwan soon and act as a negative pressure on its scrap markets.

Japan, facing slowing domestic demand as Tokyo 2020 Olympics construction ebbs, has been offering exported billet, and its trade spat with South Korea is jeopardising 4mn t/yr of scrap exports to South Korea. Tokyo Steel lowered its domestic scrap purchasing prices twice over the past two weeks as a result of slowing domestic and export demand. Japanese scrap suppliers may cut prices after the September Kanto tender bids for exported scrap dropped by ¥2,000/t ($18/t) to ¥24,500/t ($226.97/t) yesterday.

Vietnamese mills were facing a tough time, with large amounts of imported material coming into the country. Producers have been striving to cut raw material costs to stay competitive in the domestic market, but as local demand remained sluggish, they could continue to face a difficult time.

Knock-on effect

Turkish longs mills cut production in a bid to stabilise prices, and there is an expectation that flat sellers will follow suit because of the weak domestic market and lackadaisical European demand.

Southeast Asia buyers are holding off purchasing steel from Turkey, expecting its scrap prices to fall further, but Turkish mills are not so sure, given the slowdown in flows to their suppliers created by low prices. Turkey's ferrous costs have fallen level with China, slipping to a slight discount of $2.32/t of steel yesterday as a result of the rebound in Chinese iron ore import prices to nearly $100/dry metric tonne.

Cutbacks in European steel production, forced by low demand and negative margins, has shifted some iron ore supply to Asia, with Brazilian pellet heard to have been sold into China at levels below prices into Europe.

But low demand, led by the integral automotive sector, and weak global markets are keeping European prices under pressure. Should the spot market remain at current levels, down by more than €60/t from the start of the year, contract-focused mills could take a big hit in 2020.

India's economic slowdown is intensifying from a credit liquidity crunch that is cratering demand for automobiles and real estate.

Turkey's economy has been in contraction, hit by soaring inflation and interest rates and a 30pc drop in the lira last year. Its second-quarter GDP fell by less than expected, giving some hope that its economy is starting to stabilise.

Turkey and India have fewer tools than China and Europe to turn their economies around. Vehicle sales in India dropped by 23.5pc year on year in August, the steepest year-on-year fall since 1998. Several carmakers in the country are cutting production, as sales have been declining for a year.

The European Central Bank on 12 September announced that it would cut its interest rate further and resume a €20bn/month bond-buying programme to stimulate the economy. But it is not yet clear whether the move will be sufficient if it is not accompanied by fiscal stimulus from major economies such as Germany. German GDP has been hit by the auto downturn and the trade.

The US' protectionist policies pursued over the past three years have not inoculated its ferrous markets against the current downturn. US weekly steel production and capacity utilisation rates this week fell to their lowest level since August 2018, while US domestic scrap prices fell by $30-40/gt in September to near-three-year lows. Some manufacturers have lamented the impact on their business of the 25pc import tariffs. There is growing talk of Turkish cold-rollers offering into the US now.