China's warm start to winter heats up Chinese steel, mill profits

7 December 2017

A warm start to the winter has boosted steel prices and margins for mills in China, the world’s top producer, as the higher temperatures have allowed projects to proceed that would normally have come to a halt.

The delay in the seasonal drop-off in demand from the construction sector has prolonged a year-long rally in steel prices and pushed profits to their highest since at least 2008.

The steady demand has exacerbated a supply shortfall caused by mills in 28 Chinese cities cutting their blast furnace output by as much as 50 percent to meet air pollution targets enacted by the government to combat the smog that covers northern China during the winter.

Physical spot prices for steel rebar for immediate delivery rose to 5,210 yuan ($787.72) a tonne on Tuesday, its highest since August 2008, according to steel trading platform Xiben New Line E-Commerce in Shanghai.

Steel mills that produce rebar for construction use are making profits of as much as 2,000 yuan ($302.39) a tonne, though some mill are making about 1,500 yuan, said three analysts that follow the market.

The higher margins are the most since at least 2008, according to Xiben steel, iron ore and coking coal data compiled by Reuters back to that year.

“The construction operation rates are little changed, especially in east and southern China,” Wang Yingsheng, vice secretary general of the China Iron & Steel Association (CISA), told China Metallurgical News, the association newspaper, in an interview on Monday. “Some construction sites are speeding up the pace, so demand remains robust.”

To be sure, building will slow if the mercury plunges and there are growing concerns about the outlook for China’s real estate sector in 2018. However, for now, projects are pushing ahead and the mills are reaping the short-term benefits.

“Some projects got delayed due to the national holiday and 19th party congress in October and now they are speeding up, lifting demand,” said Zhao Chaoyue, an analyst with Merchant Futures in Shenzhen.

Chinese rebar supplies have been declining this year amid the government’s efforts to reduce overcapacity in the sector. In the first half of 2017, around 120 million tonnes of capacity were shut.

Industry website Mysteel showed commercial rebar inventories dropped to 3.16 million tonnes last Thursday, down 5.6 percent from a week earlier and the lowest since early 2009.

A trader in Hebei province said production cuts and robust construction have slowed supplies to a trickle. His company typically gets 4,000 to 5,000 tonnes a month of rebar from one particular mill, but it only received 100 tonnes in November.