On October 21, the situation in the Chinese steel market worsened sharply as the major steel futures prices fell by 6-8 percent on the day, reacting to news that the Chinese authorities will make an intervention in the coal market, aiming to ease prices which have reached record highs recently. As a result, market participants in the import billet segment have become even far more bearish, as, not only has trading been halted, but the outlook for the rest of the year is cloudy.
Steps to resolve energy crisis
China’s National Development and Reform Commission (NDRC) has stated that the rapid rise in coal prices has significantly pushed up production costs of downstream industries, and, so to ensure supply and price stabilization in the coal market, the provincial governments will have to make price interventions, set price limits, and implement other measures to control prices. “The National Development and Reform Commission will closely follow the coal market dynamics and price trends, with the relevant departments sorting out and investigating contradictions and problems in the work of ensuring supply and stabilizing prices, and coordinating and resolving them in a timely manner,” the report issued on October 19 said.
Following this announcement, thermal coal futures prices have fallen sharply, down 11 percent on Thursday, after an eight percent drop on the previous day. Moreover, similar sharp falls have been seen in coking coal and coke futures prices at the Dalian Commodity Exchange. They both tumbled by their maximum limit of 12 percent today, October 21.
The steel market is in shock as steel futures prices have also been following a downtrend. But further developments are still expected to be seen. Coal supply is still very tight and the shortage issue is unlikely to be resolved by March 2022. Physical prices in the coking coal and coke segments have not shown similar drops so far to those seen in futures prices.
Steel futures drop impacts spot prices
Rebar futures at Shanghai Futures Exchange, the major benchmark for the steel market trend, have fallen by eight percent or RMB 433/mt ($68/mt) today, closing at RMB 4,976/mt ($779/mt). “China is melting down. More pain expected in tonight’s trading session,” a trader said. Such a sharp fall in futures has been showing the weak sentiment, and the physical spot prices have also been impacted. Average spot rebar price in China has been RMB 5653/mt ($885/mt) ex-warehouse, down by RMB 157/mt ($25/mt) over a day, according to SteelOrbis.
“There is a big sell-off of overall commodities in the futures market now. A clear intervention by Chinese policy makers will cool the domestic market,” an international trader told SteelOrbis.
The current weakening of sentiments has coupled with the worsening of the situation regarding real demand for longs. “The winter is just around the corner, so I do not see any possibility of [steel demand] improving any time soon,” another trader said.
HRC futures at Rebar futures at Shanghai have also dropped, down six percent to RMB 5,268/mt ($824/mt).
Import billet market in shock, outlook also negative
The import billet market in China, which was already weak over the past week, has been in shock after the latest rebar futures price drop. Traders have almost fully withdrawn bids or have voiced very low levels. “Today, China’s market was completely destroyed. Now bids are at $650/mt CFR for steel billet,” a source from Jiangsu Province said.
“Today, rebar futures are down eight percent, nobody will bid anything. If you had asked last week, I'd have said I was still bullish until the end of October [in the Southeast Asian market], but the market is radically changing now,” an international trader said.
The local billet price in Tangshan has decreased by RMB 80/mt ($12.5/mt) to RMB 5,090/mt ($797/mt) ex-works, translating to $705/mt, excluding 13 percent VAT, and being relatively high as the level in the east of the country is lower by around RMB 50/mt ($8/mt) or so. The nominal price level for import billet, taking into account local prices, has been assessed at around $690-700/mt CFR, but no such bids have been reported today.
“We are clearly at an inflection point, where the Chinese market and the international market are dislodged,” a source from Singapore said. Most billet suppliers have been reluctant to cut offers in response to China’s fall due to still high costs and the not so big allocations available. Most offers, from the ASEAN region and India, for 150 mm billet have been at $715-725/mt CFR or above.
The worsening of sentiments in China may also hurts the mood of CIS, Turkish and Middle Eastern billet exporters, who were active in sales to China over past months. If imports to China do not improve soon, it may lead to more active sales to these producers’ major neighbouring markets.
China imported a record 17 million mt of semis in 2020 and, though this year the volume will also be significant, overall imports in Q4 2021-Q1 2022 will be reduced, according to market sources. During his presentation at the SteelOrbis 2021 Fall Conference & 85th IREPAS Meeting held virtually on October 18, Alexander Gordienko, export director of Spain’s CELSA Group, said that the semis imports to China are expected to be around 14 million mt in 2021.
$1 = RMB 6.389