Trade Review: Asian steel prices to remain tempered in Q4 by low demand, high energy costs

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, 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 hot-rolled coil, rebar and ferrous scrap markets are likely to see limited upward movement in prices in the fourth quarter, similar to Q3, held back by inflation-induced low end-user demand, the depreciation of regional currencies and high energy costs worldwide.

Chinese domestic consumption key

The outlook for Asian HRC prices looks bleak in Q4 as steel demand from Chinese property and manufacturing sectors is likely to remain weak till the end of the year, even though some support may come from stimulus packages from the Chinese government targeting domestic industries and consumer spending, according to market sources.

The prices of Asian SS400 HRC fell 15.7% to $565/mt FOB China Sept. 30 from $670/mt July 1, extending losses due to China's COVID-19-related disruptions and a property sector in distress. The demand from Chinese manufacturers also declined during this period, particularly amid severe heatwaves and power shortages in August.

Steel mills saw mostly negative margins throughout Q3 and their average is estimated to fall to minus $28.4/mt, from minus $16.4/mt in Q2, according to data from S&P Global Commodity Insights. A high production cost has also meant that mills are unwilling to lower export offers.

The weaker demand also extended to Southeast Asian markets, especially in Vietnam where a decline in the Vietnamese dong against the US dollar made it less favorable for mills to import seaborne HRC. While some regional mills have been hesitant to cut their offer prices to levels below the cost of production, Indian mills have mostly remained quiet and offered limited volumes of Boron-added HRC amid ongoing steel export duties that were first imposed in May.

Steel producers in the EU have been forced to cut production amid high energy costs, leading to higher buying interest for Asian HRC from the bloc.

Market participants expect limited price upticks in the near term due to concerns over oversupply in Asia and steel output cuts in China in the winter.

Export opportunity for Chinese billet, rebar

There is room for some uncertainty in the demand and price outlook for construction steel in Q4 as the market continues to be influenced by China's dynamic zero COVID-19 strategy, which hit consumption levels in multiple major cities in the country.

China's appetite for construction steel is likely to remain weighed down by delayed operations and project funding, and the resulting cash flow issues despite the government's efforts to stabilize the economy and restore market confidence.

Market participants said that a seasonal rebound in steel demand was not seen in September despite consumption being low throughout a hot summer and the rainy season over Q3.

Most Southeast Asian markets also reported weak domestic demand in Q3 and prices staying comparable in other markets led some mills to actively seek export opportunities. S&P Global reported nearly 500 billet offers from the Southeast Asian market in Q3, over 80% of which were from ASEAN countries.

Market participants said they expect steel consumption in China to remain weak through the end of Q4. Some steel mills will also cut utilization of finished steel capacity by either halting production lines or undergoing forced production maintenance, sources said.

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Weaker scrap prices in Q4

The Asian scrap market is also unlikely to be on firm footing in Q4, with the production and procurement decisions of steel companies likely to be dictated by rising energy prices in Europe and slowing steel demand in Asia over the coming months.

Asian scrap prices saw a V-shaped recovery at the end of Q3, as falling prices in July were followed by a strong rebound in August amid higher buying from South Korea to maintain inventory levels. Platts observed 51 deals, bids, offers and tradable indications in August for seaborne trades to South Korea, rising from an average of 27 such indicationsper month in Q2.

The Japanese market was also supported by South Korea's purchases, with Platts assessing the price of H2 grade scrap FOB Japan at a Q3 peak of Yen 49,800/mt Aug. 31, up 31.9% from Yen 37,750/mt Aug. 3.

The price upticks stopped in September, when Typhoon Hinnamnor disrupted operations at a manufacturing plant run by South Korea's POSCO and forced mills in the country to stay off the market. There was limited scrap buying interest from other Asian steelmakers as they saw margins being hit by poor steel demand.

"With all the uncertainties in the Asian scrap market, we are leaning towards a bearish market for Q4 over the general pessimism in the steel market amid poor profit margins and the ongoing energy crisis that is expected to extend into Q4," said a regional trading source.

The scrap market continues to hold promise over the longer term, however, due to its role in the drive toward decarbonizationof steel mills.