Prices Keep Growing, Let’s See What’s Next

It is a month already passed after Chinese New Year but situation in the steel market here didn’t become clear. An expected reviving after the holidays did not happen so the demand remains rather low. Time to time rumors about further hardening of government credit and investment policy are flying within the market and may weaken it even more.

A powerful negative factor remain high stocks, still keep increasing. The highest stocks are of construction steel, which demand shortened due to bad weather conditions. However, hot rolled coils are also obviously overproduced in the country.

Nevertheless, despite all negative aspects, Chinese steel companies keep increasing their sales prices. Average EXW price level for the most of steel products exceeds its market level. For example, by Mysteel data HRC cost in Eastern provinces in the beginning of the week was averagely 3950 Yuan per ton ($ 578/t) from a stock, while steelmaking companies’ offers were over 4000 Yuan/t ($ 586/t) EXW.

Despite any noticeable progress in the consumption Chinese steelmakers are quite optimistic and say they are ready for further increases. Their moods are shared at Shanghai exchange where futures contracts reached highest level during recent seven months. But this increase is hanging in the air, majority of consumers keep waiting.

Such dual situation arises grounded anxiety at plenty of market participants. Some experts believe in possible rapid price fall caused by excessive supply. Actually, any definite sign (like hardening of credit policy) may launch panic reaction, which lead to mass sales of stocks and price fall. But such scenario could be a real catastrophe for local steelmaking companies which were those who organized this price increase opposite to market logic. Starting point for these increases is coming growth of price for imported iron ore which will be the most painful for large corporations which succeeded to complete long term contracts with raw materials suppliers. Iron ore price increase for them may make 50% to the current level and even more. Middle and small steel producers buy iron ore now by high spot prices, but even current prices are overwhelming for them. That is why everyone should increase price for steel, and all Chinese steelmakers are completely unanimous here. It is possible to guess that even if negative scenario takes place in the local market, Chinese steel producers will hold their sales prices up to the end.

Export starts to play more important role for Chinese steelmakers. As expected, February steel export to exceed 2.9 M tons of January, and in March HRC only may reach to a million tons. Chinese companies keep increasing export quotations. HRC reached $ 580-600/t FOB, but in the second half of March the largest suppliers aim to put the price to not less than $ 600/t FOB. At least this is essentially lower than for instance prices for Japanese hot rolled coils which may reach even to $ 700/t FOB in Q2.

With favourable conditions Chinese exporters obviously will try to strengthen their presence in Middle East too, taking into account freight rates are not quite high now. So Russian and Ukrainian steelmakers should pay special attention to “Chinese factor” when planning their sales policy.

Chinese HRC local and export prices:

Blue line - EXW local stock, $/t

Red line - FOB for export, $/t

Thursday, March 11, 2010
Ferrous metals
Source: Rusmet.ru