Supply hurdles, rising demand boost China steel profits

China's steel sector profits have rebounded over the past month on the back of supply disruptions at northern ports and robust demand from the construction sector.

The average gross profit margin on rebar sales is now at around 500-700 yuan/t ($71-100/t), up from Yn200-400/t when Argus last surveyed mill profits on 21 October. Gross profit margins for hot-rolled coil (HRC) have doubled over the period to Yn400/t.

The Argus-assessed rebar price ex-warehouse Shanghai has increased by 15pc since 22 October to Yn4,130/t on 26 November, while the HRC price has risen by 6pc to Yn3,710/t over this period.

Strong winds at ports in northeast China significantly slowed shipments to Shanghai and other south China regions in the second half of this month, squeezing supplies. Shipments from north China ports to the country's southern regions typically rise in the winter as construction activity slows down in northern cities such as Beijing.

Consumer demand in the construction sector has remained robust despite the onset of winter. Construction activity slows in the winter months, but the extent of the drop has been muted since 2017. Nationwide rebar stocks held by mills and trading firms fell by more than 420,000t in the week to 21 November, indicating brisk offtake by consumers and traders, while production rose by more than 80,000t, third-party data show.

China's real estate sector has remained the bulwark of steel demand this year. Real estate investment and new project starts are each on course to post 10pc growth in 2019. But infrastructure investment growth has remained low at around 4-5pc this year, despite a massive injection of central government funds through special bonds. These sectors together account for around 60pc of the total steel consumption in China.

Higher profits this month have prompted mills to use more mainstream medium and high-grade fines and direct-charge material to keep output at peak levels. The Argus ICX 62pc index rose by around 15pc from 11 November to $89.70/dry metric tonne (dmt) on 25 November, before slipping back to $88.30/dmt on 26 November.

Steel sector profits in the January-October period fell by 44pc to Yn212bn, according to the national bureau of statistics. Profits are likely to stay below year-earlier levels in 2019 as whole, despite a likely boost this month, with steel demand set to slow in December as the winter intensifies.

There is also mounting uncertainty about November-March output restrictions in key producing provinces such as Hebei and Shandong. The extent of last winter's restrictions was announced by late October 2018, but there has been no official information on this year's plans so far. Any strict curbs imposed on steel output could support steel prices if demand largely remains stable, while looser restrictions may cap price gains.

By Prasenjit Bhattacharya