Chinese steel margins recovered in November on the back of rising domestic steel prices and steady iron ore prices, and could increase further next month, market sources said this week.
Margins for Chinese domestic hot-rolled coil spiked by 350% over November, starting the month at $11.94/mt and reaching $53.58/mt by November 26, according to S&P Global Platts analysis.
Domestic rebar margins shot up 79%, hitting $101.77/mt on November 26, from $56.92/mt at the start of the month.
Platts mill margins are in part based on a three-week "offset" or lag period to reflect delivery times for iron ore.
Seaborne iron ore prices weakened from the second half of October, helping to broaden margins for steelmakers in November.
The Platts 62% Fe iron ore, or IODEX, benchmark stayed above $90/mt in the first half of October, but fell to a near 10-month low of $78.45/mt on November 11, Platts data showed.
Chinese steel prices rallied in November, supported by robust downstream demand and a strong futures market.
Normally, the market quietens down in late November when cold weather across northern China slows construction activity.
Property and infrastructure construction has, however, been robust, while manufacturing is showing signs of recovering.
China's Ministry of Finance indicated this week that it will issue special bonds in early 2020, according to Chinese media reports.
In the first quarter of 2019, local government bonds hit a record high, and a repeat would have a big impact on construction steel demand and raw material prices in Q1 2020.
An iron ore trader in China's Shandong province expects steel mill margins to increase further before the country's Lunar New Year holiday which starts on January 25.
Restocking of iron ore before the coldest winter months and ahead of the Lunar New Year usually supports iron ore prices, he said. But steelmakers are cautious about possible winter production curbs, which would reduce their requirements for raw materials.
The Shandong trader expects iron ore prices to fall below $80/mt CFR in December, before strengthening in early 2020 due to possible supply shortages.
An international iron ore trader said most steelmakers were keeping iron ore inventories of 7-15 days, but would gradually increase procurement if no significant winter output cut measures are announced.
Iron ore supply in November and December should be strong as Australian and Brazilian miners export as much as they can before wet weather impacts mining operations and shipments in Q1. Rio Tinto and Vale's financial reports are on a calendar year basis, so the miners will want to recoup lost exports earlier this year and maximize revenues before the end of the year.
Source: S&P Platts