Asia ferrous markets fall as trade deal prospects fade

Fading prospects for a US-China trade deal sent Asia-Pacific ferrous markets down sharply today, while a big depreciation in the yuan raised the chances of a resurgence in Chinese steel exports.

The ICX index fell by $8.05/dry metric tonne (dmt) or around 7.4pc to $99.80/dmt cfr Qingdao today. Supply shortages since January had sent prices above $125/dmt in July, but macro-economic concerns have overshadowed the lingering supply tightness in recent weeks.

The fob China hot-rolled coil (HRC) index fell back below $500/t for the first time since June, as Chinese mills saw price cuts of $10/t as reasonable given the weaker yuan and gloomy outlooks.

The Chinese currency declined to more than Yn7 to the dollar today, the lowest level in around a decade. This is good for exports, said on trader, who said HRC offers could fall by at least $10/t after the latest depreciation.

A move to stimulate steel exports with lower prices could be one way to fight the US in the unfolding trade war, a steel market participant said. The US escalated its trade war with China last week with President Trump threatening more tariffs.

China's central bank said it can keep the exchange rate stable, leading some market participants to expect little more weakening of the yuan. But at least one analyst said the yuan's break above Yn7 to the dollar could be an indication that China is testing market reaction to a wider range for the currency, and may be a rehearsal for bigger moves in the future.

But even if it triggers more steel exports, the yuan weakness still underscores risks to overall demand for steel and steel feedstocks.

"In theory, the yuan devaluation will be good for our steel exports, but we think the negative impact it brings will be more on the whole Chinese economy," a Hebei mill manager said. "Today both mills and traders are also concerned about the Hong Kong [protests], which might further dampen the economy."

China's summer slowdown in construction steel demand and the increased frequency of pollution restrictions in north China are removing support for iron ore. Prices of iron ore surged by 74pc this year to July after seaborne markets lost more than 100mn t/yr of supply.

Chinese mills have operated on narrower profit margins this year, squeezed by record steel output in China and rising costs for iron ore and coking coal, which have acted as a floor for Chinese steel prices.

Asia-Pacific premium hard coking coal prices were mostly stable today, following sharp declines last week as traders dumped positional cargoes.

The fob Australia premium low-vol hard coking coal index has fallen by around 29pc to $157.40/t this year as Australia's supply chain problems have eased and Chinese spot purchases have slowed over the past month as imports run up against annual quotas.