Iron ore and steel declines steepen as margins shrink

The declines of Asia-Pacific steel and iron ore prices accelerated today, with Chinese steel mills bracing for losses amid slowing demand and no sign that policy makers will backstop.

Beijing has resisted releasing another round of stimulus measures to shore up economic growth in the face of mounting trade tensions with the US, and it has loosened steel output restrictions during the winter off-season to keep markets well supplied. Domestic steel prices have fallen by more than 20pc over the past month.

Tangshan billet prices have dropped by 22pc over the past month to 3,120 yuan/t ($449/t) ex-works today from Yn4,000/t on 26 October, their lowest level since June 2017. Shanghai ex-warehouse prices for HRB400 16-25mm rebar have fallen by 19pc to Yn3,800/t from Yn4,690/t a month ago.

"Mills' margins are shrinking fast with steel prices coming down," a north China iron ore trader said. Iron ore prices had held steady despite steel price declines since late October as profits kept mills geared to maximising productivity. Mills began to report negative margins for flat and long products last week, removing that profit support for iron ore.

Iron ore falls below $65/dmt

China-delivered seaborne iron ore prices fell by 6.9pc today, the steepest drop in 19 months, to below $65/dry metric tonne (dmt).

"We saw some mills switch to [super-special fines] SSF or [Jimblebar fines] JMBF instead of high-quality fines to lower the steel production cost. This will be an industry trend that steel mills seek to become more economical. The days of mills using the best cargoes to maximise production are gone," a Tangshan trader said.

Some major mills began aggressively selling mainstream 61pc Fe PB fines in portside markets late last week, and today mills showed up as buyers of lower-priced ores, including 57pc Fe SSF and 61pc Fe JMBF.

The SSF portside differential to the 62pc PCX portside index narrowed to 34.3pc today, its lowest discount to the PCX since Argus launched its SSF portside brand index in August 2017. The discount last week had been around 38pc. An official at a major Chinese trading firm said that it sold out of SSF spot cargoes today.

The Argus ICX 62pc seaborne fines index fell by $4.80/dmt to $64.60/dmt cfr Qingdao. Declines were steeper for high-grade ores. The 65pc fines index fell by 9.5pc, or $8.50/dmt, to $81/dmt cfr Qingdao.

Steel back to surplus

Global steel margins have been well supported since early 2017, when China began shutting illegal scrap induction furnaces. That left China short on construction steels, allowing blast furnace-based steelmakers to expand output. Much of the illegal output went unreported in official statistics.

China's crude steel output hit a record high in October at 82.55mn t, putting its year-to-date output up by 6.4pc at 782.46mn t and on track to surpass 900mn t for 2018, around half of the world's total supply. With China's growth slowing for its real estate and infrastructure investment, its steel supply is now in surplus and increasingly showing up in seaborne spot markets. Six months ago, its mills did not sell into export. Today they are slashing offers, sending the Argus Chinese export rebar price down by $19/t to $494/t fob China today.

Asia-Pacific coking coal markets have so far been immune from the declines in related ferrous markets. The Argus premium hard low-volatile coking coal index was unchanged at $224/t fob Australia as record vessel queues in Queensland and the region's seasonal wet season threaten supply, and India potentially offsets slower demand into China.