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China steel raw materials oversight increases as demand soars

China's steel and raw materials trends are increasingly in focus, with expectations of a slowdown yet to materialize amid record Chinese demand for Australian coking coal and iron ore this year. Understanding the potential effects of a new met coal import policy being hotly discussed in the markets will be critical, as other steel markets recover slowly and spot coking coal prices take a downturn this week.

After weaker steel prices in August and September, Chinese domestic rebar and HRC prices have rebounded this month, supporting margins. Steel output slowed down a little in September, from high growth rates, and annual totals are set to exceed 1 billion mt for the first time in 2020.

As China's record steel and iron output growth in 2020 continues, this brings with it the potential to increase the pace in imports of iron ore from Brazil and coking coal from Mongolia.

Imports from Brazil saw weaker first-half volumes amid coronavirus restrictions and seasonal weather effects on production, while Mongolia's temporary border closure prevented regular coal shipments to coal-washing plants in China.

Brazil's Vale plans to boost iron ore shipments in the second half of 2020 to help meet its annual target, after shipping just over a third of its annual production target in the first half.

Commerzbank said China's iron ore imports were "surprisingly robust," citing September's trade data at 108.6 million mt as the fourth consecutive month with imports of over 100 million mt/month.

While iron ore fines 62% Fe IODEX prices remain close to a year-to-date high of $130/dry mt CFR China in September, high-grade ores, lump and pellet premiums in China have increased from very weak levels in August.

The increase in premiums is a sign of a gradual normalization around value-in-use, port inventory availability, and stronger demand for direct charge ahead of sintering and steel capacity reductions.

"Steel production, which requires a lot of iron ore, is in full swing in China," the German bank said in an Oct. 13 report.

China's pig iron output grew 5% in August, year on year. Pig iron growth hit 3.4% to 589.4 million mt in the first eight months of 2020, according to World Steel Association data.

The pace of growth had quickened to a 3.8% rate since April, as steel demand increased and policies supported investments.

Coking coal

New restrictions coming into force for coal imports in China may be more negative for coking coal and expected to hit Australian met coals harder.

This is according to reports of verbal notices extended to some steel and power utility traders and buyers to suspend imports and wider industry concerns on import permit issuance, as heard in the market in the week of Oct. 4 and reported by S&P Global Platts, and also covered widely by media and analysts this week.

Australia is the world largest iron ore supplier and is China's biggest source of the commodity.

As for iron ore, analysts do not foresee any import restrictions currently, as China depends on the ore for more than three quarters of its needs, while it is largely self-sufficient in coal.

"We expect China to refrain from restricting Australian iron ore imports as this would have a material negative impact on the Chinese steel industry," UBS analysts said in an Oct. 13 report.

India, which is the second-largest steel producer and third largest coking coal buyer, has seen pig iron rates improve over the third quarter after idling plants earlier.

"India is steadily improving but remains well down on pre-pandemic levels," ANZ analysts said in an Oct, 13 note.

India may be more viable as an alternative short-term coverage market, especially given strong orders for Q4 loadings talked about in the US export market, which may not be fully confirmed, and interest in rebuilding stocks of premium mid-vol coals.

"What we are seeing is an opening up of non-China markets, in particular India which saw Australian met coal exports at 4.6 million mt, the highest monthly level since June 2019, UBS said.

Coal shipments from Australia to China had already grown fast, helping compensate weaker demand for Australian met coal in Europe so far this year, and restrictions may help manage quotas, according to analysts.

Mongolian coking coals imports to China are 45% lower through August.

US volume

Volumes from the US over the first eight months are higher than in 2019 when additional tariffs were in place, limiting price competitiveness for US imports, which contend with longer and more costly voyages, compared with Asia-Pacific exports.

Now, high global dry bulk spot freight rates, and stronger US met coal demand in North America and in Atlantic Basin markets, as well as for US blended coking coals in India, may limit current opportunities to offer into China.

US low-vol HCC with low ash and sulfur is usually the main grade trading to China, and high-vol A into China has seen recent demand too, according to market sources.

Canadian coking coal imports to China have increased by 45% to 3.13 million mt in January to August 2020.

China's met coke prices are rising since August, squeezing steel margins. The spread with imported coking coals may still encourage imports, while preventing a further build-up of coal ready for discharge against 2021 quotas.

By limiting coal imports, further longer-term volatility with domestic coking coal and coke markets may be reduced, at least in theory. Australian coking coals are expected to be discharging as normal in January and February, a trader said.

"Import restrictions have been a reality for at least the last year and while our bullish long-term view on met coal does not require easing restrictions on Chinese imports, it does require trade relations between the two nations to not materially worsen," B Riley Securities analysts led by Lucas Pipes said in a note Oct. 13.

"As recently as three weeks ago, investors were speculating that Chinese import restrictions might begin to ease, so the recent headlines had a chilling effect on sentiment and pricing. We view China's alleged verbal order as a strategic move to put pressure on Australia, but believe an outright ban for an extended period is unlikely as Australian coals are highly desired in China for their quality," the B Riley report added.

The signs are China is closely managing the economy and the effects from record steel production.

With iron ore prices still close to year-to-date highs and steel margins tighter, preventing distortions in steel raw materials pricing and trade remains a challenge. A smooth transition may be a "win-win" for the global market given China's outsize influence this year and a longer coronavirus effect spilling into global steel markets outside China.

Source: S&P Platts

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