TRADE REVIEW: Asian steel, scrap to face headwinds in Q2 on lackluster demand, export challenges

This report is part of the S&P Global Commodity Insights' Metals Trade Review series, where we dig through datasets and digest some of the key trends in iron ore, metallurgical coal , copper , alumina , cobalt , lithium , nickel and steel and scrap. We also explore what the next few months could bring, from supply and demand shifts to new arbitrages, and to quality spread fluctuations.

The Asian steel market is set to face challenges moving into Q2 amid a sustained bearish Chinese property and construction sector outlook, and weakening support from raw material costs. Ferrous scrap sees muted demand across regional markets, with some Asian mills looking toward domestic scrap to potentially offset a weaker downstream steel market.

Chinese billet exports competitive

Chinese billet exports maintained a competitive edge in Q1 on a widening export parity, as the spread between international CFR Southeast Asia billet prices and Chinese domestic billet prices widened on weakened domestic Chinese prices; a trend expected to extend into Q2 as the domestic market outlook remains pessimistic on China's protracted property downturn.

Platts assessed 5SP 130 mm billet on a CFR Southeast Asia basis at $508/mt and Chinese domestic billet at Yuan 3,490/mt on a Tangshan ex-stock basis for Q235 billet material.

The spread between CFR Southeast Asia billet and Chinese domestic billet widened to $56/mt in the first quarter, with the slump in Chinese domestic billet prices rendering Chinese cargoes more competitive in the seaborne market. However, the spread quickly narrowed to $26/mt on April 12as Chinese prices rebounded on lower output and inventory levels for longs products.

"While China largely exports flat steel products, slowing property construction and a delay to some infrastructure projects could result in a lift in long steel exports," said Paul Bartholomew, S&P Global Commodity Insights senior analyst for metals and mining.

Despite the arbitrage opportunity, some market participants expressed reservations about whether China would be able to export semi-finished products in large volumes in Q2.

"Although there are no concrete limits for the export of semis, we are holding back from offering at too low prices, because it doesn't make sense to engage in a non-profitable business that may cause scrutiny," said a China-based billet trader. However, he pointed out that it was unlikely for China to impose duties on billet exports.

Chinese HRC market under pressure

With the faltering Chinese property market weighing heavily on longs prices, Q1 saw some large Chinese mills diverting their hot metal from producing long steel products to making flats instead, given the healthier demand for HRC as compared with rebar.

The spread between Chinese domestic HRC and rebar prices widened to $38.06/mt in end-March, compared with $12.85/mt in December 2023.

However, Asian HRC prices in Q2 might continue to extend its downtrend first seen in Q1 amid continued weakening support from raw material costs and muted seaborne demand, according to market sources.

Platts assessed SS400 HRC China at $516/mt March 28, down 9.5% from $570/mt Jan. 3.

With diminished export sales in Q1 compared with Q4 2023, and the continued weakening of HRC demand and prices in the EU and the US, Chinese HRC exports are likely to continue facing headwinds moving into Q2, said market participants.

"Turkey is bidding low due to lackluster rebar demand; EU demand is also shrinking on the weakening local prices and limited import quota for flats products, while demand from South America declined on the weakening US market [as Brazil is a major exporter to the US]," said a Southeast Asia-based mill source.

Similarly, waning opportunities for Chinese HRC exports to India are seen amid a narrowing price spread between Chinese and Indian domestic HRC.

The spread between Indian and Chinese domestic HRC prices ended Q1 at $93.78/mt, almost half the peak level seen in 2023 of over $183/mt.

"Imports from China decreased from Q4 2023; China has little chance to export into India now—Japanese HRC is cheaper for India," said an India-based source.

Looking ahead, HRC market activity in India during Q2 is expected to be muted amid general elections, sources said. Most participants also expect that prices in the domestic market might slide further in April and May with excess supply.

Bearish Asia ferrous scrap sentiments

Asian ferrous scrap markets turned bearish in Q1 following the Lunar New Year holidays as downstream steel demand did not recover to expected levels.

Taiwan's containerized import price fell from $380/mt CFR on Jan. 17 to $361/mt CFR on April 15, while Vietnam's bid levels for Japanese H2 grade also plummeted to $365-$368/mt CFR on April 15 following a high of $405/mt CFR in January.

Buyers adopted wait-and-see approaches, with one Taiwanese mill stating that "we have changed procurement strategy this year and will keep inventory levels to a minimum."

Negative sentiment has lingered into Q2 following several factors depressing demand.

Indonesia is likely to remain on the sidelines due to the Ramadan period extending into April, while Taiwan saw an increase in electricity prices starting April 1, as part of a series of structured government hikes.

South Korea has also remained on the sidelines in importing scrap since Q3 2023 and is expected to continue to do so amid a ruptured property market.

There may, however, be some factors in the supply source, Japan, that could support prices. Japanese traders were expecting logistical costs to rise significantly as a new labor law limiting working hours came into effect on April 1. Meanwhile, scrap generation was said to be weak due to "delays in the construction sector," according to one Japanese mill source.

As the supply and demand side price gap continued to widen in the seaborne markets, Asian mills were thus looking inwards to a limited supply of domestic scrap in the hope that better logistical conditions and lower inventory levels could offset a weaker downstream steel market.