Soaring China rebar strengthens Turkish export position

Chinese steel rebar domestic and export prices have jumped since bottoming on 22 June, allowing Turkish steelmakers to regain the competitive position in seaborne rebar markets they achieved in May after China eliminated export tax rebates.

Chinese steel rebar domestic prices bottomed at 4,800 yuan/t ($741/t) ex-works Shanghai on 22 June and rose by Yn450/t over the following four weeks. Chinese export rebar prices have risen by nearly $100/t over the period, as government policy announcements restored upward momentum to steel market fundamentals.

The Tangshan area became subject to intensified production restrictions on 24 June as China's government strengthened its campaign to control steel output and work towards a zero net emissions target. Construction sites in Beijing faced operation suspensions with the approach of the Communist Party's 100-year anniversary and automotive factories were told to slow down production.

In the week beginning 28 June, Chinese steel prices reacted to the tighter production restrictions but it was not until the following week that the market realised how stringent the government would be over steel exports and output. On 6 July, several steel mills in Shandong and Jiangsu provinces received notices stating that they must control steel output this year to 2020 levels or lower. All nationwide regions were then notified that a new government policy was being enforced for the rest of this year that would support Chinese export rebar prices for the entirety of 2021.

Perhaps most noteworthy is that Chinese steel rebar exports were up by 30pc year on year in the first half of 2021, which means there would have to be a huge turnaround in export volumes in the second half to meet the new production goals. Some major state-owned mills have almost run out of their yearly quota. Beijing also plans to investigate steel mills' exports, including direct and indirect exports of steel that were processed into downstream products. Even domestic allocation that was bought by traders and reshipped abroad is under investigation.

There was more market discussion yesterday that the government will levy a 20pc tax, at least on hot-rolled coil exports, on 1 September. Many market participants expect this will include other steel products such as rebar.

All of these measures will help to support global seaborne rebar prices, particularly for Turkish steelmakers given that Turkey is such a large global player and a leading price maker in southeast Asia. Competitively priced Indian rebar and heightened freight rates have pushed Turkey out of southeast Asia in the past month but freight has come off slightly better in the past 10 days, when commodity prices dipped. Additionally, high Indian rebar sales to Hong Kong mean that Indian steelmakers are mostly sold out for the near future. The sales occurred at increasing prices in the past four weeks, with the latest deals indicated at around $725/t fob on actual weight basis.

Turkish steelmakers' lengthy rebar order books mean they can still keep offers to southeast Asia firm, while the Middle East, Yemen, South America, eastern Europe and central America have all been buying from Turkey during the Chinese price rise.

Chinese export rebar offers increased to $915/t fob on theoretical weight basis yesterday, effectively $200/t above Turkish rebar offers at $730/t fob on actual weight basis, a spread last seen in the first half of May. Turkish mills were able to achieve rebar sales at rapidly increasing prices with that spread in mid-May, with Argus' fob steel rebar assessment peaking at $772/t fob on 24 May, $47/t higher than today's assessment.

The Chinese government stepped in to stop construction prices rising further in mid-May, when Shanghai ex-works prices reached around Yn6,000/t. But that price is still around Yn750/t higher than today's equivalent. This has led Turkish mills to expect Chinese domestic and export rebar prices to maintain today's prices in the medium term and allow Turkish export prices to stay at current levels at minimum.

The Turkish government stepped in to pressure construction prices at the beginning of June, when Turkish domestic rebar prices reached the equivalent of around $750/t ex-works. Turkish domestic rebar prices are now around $710-715/t ex-works excluding value-added tax. The Turkish lira has also appreciated against the dollar and is stronger than the TL8.68:$1 in the first week of June when the government called for lower construction prices.

Turkish scrap import prices have not followed Chinese steel price trends since the beginning of July. US scrap flows have been so liquid that they forced US exporters into aggressive sales to Turkey from 5 July. Turkish scrap import prices appear to be edging down based on the flows at exporters' docks.

But with Turkish scrap demand set to return after a national holiday next week, the onset of Russian scrap and steel export taxes on 1 August and potential Chinese steel export taxes, Turkish scrap import prices will find some support even if US flows result in prices staying relatively rangebound.

Scrap supply fundamentals from the US and steel supply fundamentals from China support Turkish mills maintaining their scrap-rebar margins and potentially increasing them above $240/t.

Chinese domestic rebar prices decreased by Yn20/t today as sentiment cooled but last month's price rises and the widened spread between Turkish and Chinese export offers firmly support Turkish rebar prices in the short to medium term.

By Alex Reynolds