Crude steel production cuts in China have boosted domestic steel prices, which in turn provided considerable upside support for feedstock quotations. There was no cyclical slowdown in China at the end of the year when construction activity usually cools down. Chinese steel prices have remained resilient amid the countrys crackdown on emissions.
The bullish Chinese market sentiment has been further fueled by increased buying activity amid restocking. Buyers, planning ahead of the Lunar New Year, have been purchasing iron ore for shipments arriving before the holidays commence in mid-February. Moreover, there has been restocking activity ready for the lifting of the winter output restrictions in China, due in mid-March, after being effective since mid-November 2017.
As a result, iron ore port stocks accumulated an additional 10 million tonnes in December to a new record-high level of above 150 million tonnes on January 5.
Rebar and hot-rolled coil prices in the Chinese local market surged to multi-year highs in the first weeks of December, but prices have come down since mid-December, easing upward pressure on the steelmaking raw materials market. We are bearish on the Chinese steel market prospects for 2018 in general, as output is likely to stay elevated.
However, rebar and HRC prices have a long way to go down before they start eating into the extraordinarily high operating margins that Chinese steel mills are now enjoying, as feedstock prices remain relatively low. Real-time operating margins reached record levels in mid-December, with rebar and HRC producers getting over $370 per tonne and $290 per tonne, respectively.
Prices for raw steelmaking materials are likely to stay elevated in the near-term before they lose upside support from the steel market, as well as from restocking activity.
Near-term upside risks to iron ore prices include concerns over severe weather conditions in Australia. On January 9, the Australian Bureau of Meteorology issued a warning for a severe cyclone, which stopped iron ore exports from Port Headland for two days. Tight local iron ore supply in China also favors suppliers, as run-of-mine output started to drop in November.
Supply-side issues have also been supporting coking coal prices. Congestion at the Dalrymple Bay Coal Terminal and production disruption continued to keep supply tight on the seaborne market and pushed spot prices higher though December. Coking coal prices surged to a seven-month high in mid-December, a record high since the price hike caused by Cyclone Debbie.
The price spikes were further boosted by mills restocking material before resuming output in early 2018. We expect coking coal prices to keep fluctuating, after support from restocking weakens. The volatility suggests that the influence of Chinese buyers is less significant that those based in Australias major export markets such as the European Union. However, we believe that the current $60 per tonne premium for non-China buyers of Australian PHCC is far from sustainable, as over the past four years the premium for EU-bound trade averaged just $7 per tonne.
International scrap prices have continued to rise, as bullish sentiment due to active buying in the Turkish import market has had a knock-on effect worldwide, primarily on the prices in Europe and the United States. In China, the downturn in blast furnace iron production amid winter cutbacks appears to be stimulating scrap usage at integrated mills. Chinese scrap is still trading at a premium over hot metal costs. Although the anticipated steel prices retreat in China and, consequently, worldwide will take its toll on ferrous scrap and iron metallics prices, we doubt raw materials suppliers will be willing to yield immediately amid steady steel output volumes (i.e. demand).
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