End of the holiday: as margins collapse, Chinese steel mills prepare for tough times

MANILA / BEIJING (Reuters) – Chinese steel producers recorded losses for the first time in three years this month, as prices slid into a bearish market due to weak demand and a near-record offering, ending years of strong profit margins.

And with the world's second cooling economy and the increased risks of a growing trade war with the United States, Chinese steelmakers will probably suffer more if Beijing does not launch new stimulus, according to traders and analysts.

In the face of falling prices, Chinese steel companies, which produce half of the world's steel, reduce their costs by returning to iron ore, a cheaper raw material, for the benefit of miners such as the Australian group Fortescue Metals Group (FMG.AX).

China's steel production reached a record 82.55 million tonnes in October, but steel prices and margins have since declined, while China has reduced the limits of winter production to reduce smog.

"The fat margins were driven by firm demand and limited supply, which is unsustainable in the long run," said Richard Lu, CRU analyst. "This decline is not temporary, but the beginning of a downward trend."

Chinese steel producers have been supporters since 2016, when prices had doubled, as a solid infrastructure boosted demand and supply as a result of the country's tough anti-pollution campaign. had disrupted production.

Beijing also removed 140 million tons of low-end steel capacity in 2017, about 17% of this year's total output.

Profit margins reached a record high of 1,706 yuan ($ 246) per ton for rebar and 1,326 yuan for hot-rolled coils in December 2017. They remained high this year, pushing mills to increase their production.

But as demand began to weaken this month, steel mills were left with a steel surplus, compounded by lower production restrictions this winter, with China allowing regions to set their own production restrictions. depending on the emission levels.

The price of Chinese rebar – used in construction – fell by 21 percent to 3 496 yuan per ton on Monday, after a seven-year peak in August, putting it in a bear market.

Profit margins have decreased. The rebar producers in the big steel city of Tangshan saw their margins shrink to 297 yuan per ton Monday, against 889 yuan in late October, according to data collected by Jinrui Futures.

Manufacturers of hot-rolled coils (HRC) – used in the manufacturing sector – suffered a loss this month for the first time since November 2015, said Jinrui Futures, estimating it at 130 yuan (18, $ 75) per ton on November 21st.

Tivlon Technologies, a data analysis company on steel and iron ore based in Singapore, expects a loss of 150 yuan per ton for Chinese HRC producers during the second half of November, against 200 yuan in the first half. Most producers of rebar are in equilibrium, according to Tivlon.

DROPS PREMIUM PREMIER ORE

Anticipating a further drop in steel prices, traders who typically stock up in the winter before spring demand picks up are avoiding repopulation, bringing inventories down this year.

"The risk of storing physical steel products is too high at the moment," said a rebar trader from China's Liaoning Province in northern China, who gave his last name to Wang. "The market is generally convinced that prices will only drop if steel companies voluntarily reduce their production."

In the midst of falling steel prices, the average utilization rate of Chinese steel mills dropped to 67.54% last week, after three consecutive weeks of hike, revealed data collected by the consulting firm Mysteel.

Plants that previously favored high quality iron ore for maximum production while emitting the least emissions also reduce costs by using more substandard materials with less than 60% iron.

This change benefits miners like Fortescue, who have been repressed against high-caliber producers like the Brazilian Vale (VALE3.SA).

"We recently saw increased demand with factories buying more than 58 percent of materials in response to declining steel margins," Elizabeth Gaines, chief executive officer of Fortescue, told Reuters by e-mail.

The 65% iron ore price for China SH-CCN-IRNOR65 fell to $ 81 per tonne, its lowest level in seven and a half months, while the 58% price fell to $ 36.50. , its lowest level since June SH-CCN-IRNOR58, according to the SteelHome board.

This brought the premium for high quality down to $ 44.50, the lowest since March. In July, the premium reached a record 54.70 USD, with the Chinese bid for a clearer sky increasing the preference for higher quality ore.

"If margins continue to fall, more factories will use low-grade iron ore," said a manager at a plant in southern China, which produces both low-grade iron bars and low-grade iron ore. frame and HRC.

($ 1 = 6.9397 Chinese yuan)