China Steel Production and Prices Lift - EAF Producers Might Benefit

1 December 2017

This Insight is the fourth in a series of five that look at China's capacity reduction programme and its key implications. In this Insight, we examine the impact of improved Chinese capacity utilisation on EAF production elsewhere in the world, particularly South East Asia, and on scrap market dynamics and prices. We find that, given a stronger steel price environment and lower availability of both finished and semi-finished steel in China, EAF-based production elsewhere is higher. Furthermore, higher billet prices and stronger scrap demand are supportive of higher scrap prices. Margins for EAF-based producers will decline from current levels, but not to the lows of a few years back.

Better times to remain for EAF producers in Asia

CRU forecasts ongoing increases in Chinese crude steel capacity utilisation as spare capacity is cut further. Our domestic steel price forecasts have been upgraded, and with them, expectations of industry profitability. Likewise, our outlook for Chinese steel export volumes, both finished and semi-finished, have been reduced.

Lower availability and higher prices of billet are expected to lift EAF-based steel output elsewhere as steel producers that had, in recent years, reduced primary steel output in favour of importing lower cost billet, will be more able to produce. Scrap and billet prices represent an arbitrage opportunity for EAF-based steelmakers, something that has played out strongly since 2014. Higher finished steel and billet prices will lift scrap demand and prices as EAF-based output increase. Because scrap prices are expected to rise in line with steel prices, and domestic premiums are unlikely to rise, margins for EAF-based production are not expected to lift substantially because of higher scrap use. That said, the spread between finished steel and billet prices is expected to remain in place, which will support margins, but at a slightly lower level than in this past year. Note: for simplicity was have excluded any potential impact from a shortage graphite electrodes and higher conversion costs in this analysis; please contact us for a recent article on this topic if of interest.

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