Supply crunch drives Shanghai HRC price surge

Chinese domestic hot-rolled coil (HRC) prices have increased premiums to rebar to their highest level in at least two years as post-lockdown demand outpaces supply.

Shanghai HRC prices have surged by 27pc to 4,060 yuan/t ($584/t) since early April, compared with rebar, which has risen up 7pc over the same period. The HRC-to-rebar premium stood at Yn420/t ($60/t) today, with Shanghai rebar at Yn3,640/t. The prices include a 13pc value-added tax. The HRC premium is its highest since Argus began assessing Shanghai rebar in 2018.

China's export prices have followed its domestic prices higher, and its steel imports have surged to a 16-year high, generating the main support for seaborne steel markets still stricken by Covid-19 slowdowns.

After China lifted its lockdowns in March, Shanghai HRC ex-warehouse prices stood at a discount of as much as Yn210/t to rebar by early April. Construction projects started up quickly to support rebar prices. Flat steel prices, with exposure to both manufacturing and construction, flipped to a premium to rebar in May when factories accelerated output and rainy weather took construction off its peak spring pace.

In June, HRC demand was less affected by the heavy rains and floods that have hit south China, and downstream sectors that consume flat steel to make autos, heavy equipment and household appliances have shown sustained recovery over the two months, especially for diggers, an east China-based mill analyst said.

Real estate and infrastructure projects, which draw heavily on long steels but also use flat steels, make up about 60pc of China's steel demand. Construction demand has exceeded outlooks, while machinery, auto and appliance sectors that use flat steels and account for about 30pc of steel demand also have recovered quickly. Auto sales and production surged in June and July, supported by stimulus policies to boost consumption.

HRC supply did not keep up with demand. Steel trading firms turned cautious about building inventories in the wake of record stockpiles during lockdowns. This resulted in reduced shipments into east China from March-May, leaving Shanghai with 200,000t less HRC than it had a year ago, an east China trading firm said. South China's HRC trading hub, Lecong, in Guangdong province, has 150,000t more HRC than normal as a result of reduced outflows.

The supply imbalance has sent Shanghai HRC prices Yn130/t and Yn60/t higher than HRC prices in Tianjin in north China and Lecong in south China, another east China trading company said.

Consumers that would buy hot-rolled strip as a replacement for HRC found its supply also was tight, market participants said.

Shanghai HRC prices likely have limited upside in the near term, several trading companies said, and they are reluctant to restock at current prices. Rebar prices may rise faster in the remainder of this year when construction demand picks up again in the fall, a trading firm said.

HRC fundamentals may weaken from growing supply as a result of mills' shift in output as they take advantage of HRC profit margins. Mills' gross profits have widened to Yn300/t for HRC and to Yn100-250/t for rebar, according to an Argus survey.

By China staff

Shanghai ex-warehouse steel prices Yn/t