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Analysis: Outlook for China hot-rolled coil prices uncertain after Lunar New Year

HIGHLIGHTS

Chinese HRC margins turn negative in late January

Post-Lunar New Year prices may hinge on credit conditions


China's domestic hot-rolled coil margins turned negative for the first time in a year at the end of January, while manufacturing activity – the steel product's major application – weakened for the second consecutive month.


The apparent downturn poses the question: Has China's strong post-COVID economic recovery plateaued, or is this the usual pre-Lunar New Year slowdown? Conversations with industry participants indicate that steel mills expect a post-holiday rebound, while steel traders believe prices will fall further when activity resumes.


Historically, there is no consistent pattern as to how steel or iron ore prices will perform post-Lunar New Year. S&P Global Platts monthly average data shows they have fallen as often they have risen in previous years.


HRC margins fell from an average of $85.30/mt in December to minus $18/mt at the start of February, according to Platts' mill margin data. Margins were squeezed by imported iron ore prices that hovered around the $170/mt CFR China level, and domestic HRC prices that shed around Yuan 150/mt ($23/mt) over January.

The two leading China manufacturing purchasing managers' indices both softened in January. The PMI published by the National Bureau of Statistics showed manufacturing activity fell to a four-month low of 51.3 points in the month, while Chinese media company Caixin's PMI dipped to 51.5, the lowest reading since last June.


NBS noted that new orders, export sales and overall buying levels all grew at their slowest rate in five months in January.


The Caixin report said manufacturers had been lifting their selling prices at the "steepest rate since June 2018" in a bid to protect margins from rising input costs, including steel prices.


Twelve months ago, global manufacturing was in the doldrums. But it has been the strongest end-user segment for Chinese steel over recent months, while the two usual demand powerhouses of construction and infrastructure have been relatively flat. Pent-up demand in the auto sector, in particular, has helped drive steel coil prices. Therefore, any sustained weakening of manufacturing would be a cause for alarm.


Running out of steam?

China was the first country to go into lockdown last year and the first to come out. The country's steel industry didn't miss a beat; production was extremely high, even when there was little in the way of downstream demand.


Steel prices began to climb in April, whereas other major steel markets took many months longer to recover; the US began its precipitous price climb as late as August. Price rises in the US, India and Europe can be attributed to steel supply shortages – caused by mills cutting and then hastily restoring output – as much as by pent-up demand and recovering economies.


On the other hand, production soared in China, with 2020 output up 5.2% year on year, surpassing 1 billion mt of crude steel for the first time. It has also started 2021 strongly, with Jan. 10-20 production up 7.34% on year, according to the China Iron & Steel Association.


Many governments will be pulling down hard on the stimulus lever this year to get their economics back into growth mode. China opened the credit sluice gates following its Q1 lockdown last year, but then tightened up liquidity.


Economists at S&P Global Ratings said in a note last month there would be further tightening this year and pointed out that consumers were still reluctant to spend. Ratings said China still relied on encouraging infrastructure investment "rather than helping households directly... the rebalancing of the economy towards consumption is fragile and still a work in progress."


It is these households that purchase cars, white goods and other manufactured products. If steel production remains strong over the holidays and Beijing does not loosen liquidity quickly, many in the market believe steel prices could fall further in late February.


Source: S&P Platts

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