China: Steel prices fall sharply despite output curbs. Will exports rise?

China's steel prices fell last week, with some categories of finished products falling by more than RMB 300/tonne (t) ($47/t).

At the same time, mills have begun to increase inventories after a period of "destocking".

Thus, a scenario has emerged where, against the backdrop of reduced production, steel prices have fallen and inventories have increased.

According to data, the national comprehensive steel price index this weekend was at RMB 5,423/t ($847/t), down by more than RMB 250/t ($39/t) or 4.7% from the previous week. Specifically, prices of major steel products fell. Among them, rebar and hot rolled coils (HRCs) fell by more than RMB 300/t ($47/t).

In terms of inventory, although the retail- and warehouse-level stocks in key cities decreased this week, mill-level stocks have risen. For instance, mill-level construction steel inventory was at 6.296 million tonnes (mn t), an increase of 1.2% w-o-w.

Since September, the daily output of steel has remained low. In late October, key steel companies produced 1.735 mn t of crude steel per day, a decrease of 139,000 t from the previous month and 19.5% y-o-y.

Why did prices drop?

• Decline in input costs: Why did prices fall sharply against the backdrop of reduced production? As per the Lange Steel Research Center, this was mainly driven by the decline in input costs.
  
  

Wang Guoqing, director, Lange Steel Research Center, said: "The index of iron ore has fallen to $92.8/t. This week's decline is $14/t, which is quite large. In addition, the price of coke has also fallen by RMB 200/t ($31/t). The steel raw material side has definitely fallen. Steel costs have been greatly weakened, and the support for market prices is also a weakening trend."

• Waning demand: Another reason is that steel demand is also weakening. With the recovery of the global manufacturing industry, China's industrial exports have weakened, and the demand for flat products has decreased. The demand for construction steel is closely related to the property market. New constructions... have continued to decline. New projects growth has been negative for more than three months, which is weakening demand for construction steel.
  
  

Will exports increase?

At present, steel prices in some countries are still rising. Will the decline in domestic steel prices stimulate steel exports from Chinese mills?

Industry insiders feel there is a possibility. China's policy does not encourage exports (of general steel products), but if the price gap between domestic and foreign markets is too wide, then the prospects of exports increase, especially with the recent sharp fall in domestic and spot prices compared to mid-October-levels. The decline is of RMB 700-800/t ($109-125/t).

Such a sharp decline may widen the spread between domestic and foreign prices, and may encourage mills to export.

Outlook

Industry insiders feel steel industry trends for the rest of the current calendar and entire CY'22, in the context of reduced output, will mainly depend on demand.

Wang Yingsheng, chief economist at the China Iron and Steel Association (CISA), recently said: "Based on the existing data and current scenario, we infer that next year's (steel) consumption should be similar to this year's..." Of course... other policies will have to be taken into account, including finance, infrastructure etc.

Industry insiders believe if prices of raw materials continue to fall, prices of steel may fall further. But, if costs of raw materials do not show a propensity to fall sharply, this may support steel prices. In case of the latter, steel prices may gradually stabilise.