TRADE REVIEW: Asian steel, scrap prices to see limited support in Q3 as tepid demand, export challenges weigh

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.

Asian steel markets are set to face headwinds in the third quarter amid seasonally sluggish demand and continued bearish property and construction sector outlooks in various domestic markets. Scrap prices are expected to continue seeing pressure from tepid downstream demand and increased competition from billet imports, market participants said.

HRC prices under pressure

Asian hot-rolled coil prices would likely remain rangebound into Q3 due to persistently weak downstream demand and resilient raw material prices.

Trade flow patterns within Asia could change with more competition from Japanese and South Korean mills, as tepid domestic demand alongside the depreciation of local currencies lead them to rely more on export markets.

As a result, Chinese HRC exports are competing for market share, but are at the same time losing Japan and South Korea as destination markets.

Entering Q3, mainstream mills in China were offering only $10/mt lower on a free-on-board basis than those in Japan. The spread will be nearly flat if some buyers consider thin materials, as Japanese premiums for thinner materials can be up to $10/mt lower than what Chinese counterparts would charge, according to market participants.

Weakening exports have pressured Chinese HRC prices in the second quarter. Spot prices of SS400 coil on an FOB China basis averaged $522.92/mt in Q2, down 4.2% from Q1, according to S&P Global Commodity Insights data.

Platts assessed SS400 HRC China at $502/mt FOB China on July 17, down $2/mt day on day, Commodity Insights data showed.

The spread between rerolling and commercial-grade HRC has also narrowed throughout Q2, reflecting a market where it got difficult for mainstream mills to make a hard case for charging higher for premium coil. The spread ended Q2 at $20/mt, almost half of the peak level in 2024.

Investigations over value added tax evasion in China when exporting steel also curbed the outflows of cheaper material overseas, with market participants noting that much fewer low-priced offers were available in Q2. Amid the ongoing investigations, overseas buyers have tended to hold back from bidding and continue to monitor for any prospective policies that might be introduced to eliminate the tax evasions entirely.

Vietnam-based steelmaker Formosa Ha Tinh Steel has acquired updated BIS certification for HRC, making its offers more competitive in India with no import tariffs.

Vietnamese HRC was sold at $560/mt CFR India on July 16, while Chinese cargoes were offered $545/mt CFR India, pretariff 7.5%. According to market participants, the cargo booked from Japan arrived in India in early July, weighing on domestic prices. EXW Mumbai HRC prices fell Rupees 1,500-2,000/mt in the first half of July.

Other smaller lots of HRC amounting to 150,000 mt were due to arrive in India mid-end July, according to market participants. Many expected a further correction of HRC prices ahead of the arrival of the imported cargoes.

Chinese billet exports gain edge

Chinese billet exports saw a partial slowdown on narrowing export-parity competitiveness in end-May. The spread between international CFR Southeast Asia billet prices and Chinese domestic billet prices narrowed after domestic prices rebounded amid government efforts to reduce housing down payment ratios and loan interest rates of the housing provident fund.

The spread between CFR Southeast Asia billet and Tangshan ex-stock VAT inclusive domestic billet on an export-parity basis narrowed to $24/mt May 23, as Chinese prices rebounded on lower output and inventory levels for longs products.

However, this spread quickly widened to $41/mt on July 8, with the slump in domestic billet prices rendering Chinese cargoes more competitive in the seaborne market. Domestic prices weakened amid muted demand and the rainy season -- a trend expected to extend into Q3 as the market outlook remains bearish.

"Finished steel exports continue to increase, indicating that domestic demand is not able to absorb the high production volumes," said Paul Bartholomew, Commodity Insights' senior analyst for metals and mining.

"As a result, we think this year's steel exports could be around 95 million mt, compared with around 91 million mt last year."

Platts assessed 5SP 130 mm billet on a CFR Southeast Asia basis at $501/mt and Chinese domestic billet at Yuan 3,350/mt on a Tangshan ex-stock basis for Q235 billet material July 17, Commodity Insights data showed.

Chinese domestic steel prices are expected to continue to fluctuate at lower levels amid subdued demand, relatively strong production and expectations that any upcoming policy easing would provide limited support to demand, according to market sources.

"July and August are typically some of the weakest months of the year due to high temperatures and heavy rains in southern China and a subsequent slowdown in construction activity," said a China-based trader.

Another reason behind the bearishness is the growing concern around tighter steel export inspections to rein in the VAT evasion, which could reduce exports and increase supply pressure in the domestic market, sources said.

Market participants continued to look for indications of a fiscal stimulus post China's Third Plenum and potential production cuts to gain greater price clarity in the near term.

Upside potential unlikely for Asia ferrous scrap

Asian ferrous scrap prices continued to decline in Q2 following the previous quarter's plunge, on the back of high power prices, weak downstream demand and a seaborne market flooded with cheap billets and eager scrap sellers.

Prices of US-origin containerized HMS 1/2 80:20 scrap to Taiwan declined to $345/mt CFR July 17 from $353/mt CFR March 11, following the introduction of seasonally higher power prices that led to mills cutting production by about a third. Meanwhile, although Japanese scrap prices edged up Yen 200/mt from March 27 to Yen 50,400/mt July 17, the dollar-denominated value instead fell $10/mt due to a depreciated yen, mirroring the regional downtrend.

In addition, competition from billet imports further depressed scrap prices across the region, with Russian, Chinese, Indonesian and even South Korean billets flooding the market at highly competitive prices. The billet-scrap spread even fell to as low as $142/mt on April 8, rendering billet procurement an uneconomical alternative considering the estimated scrap-billet production cost of $150-$170/mt.

Buying activity across the usually busy regions such as Taiwan, Vietnam and South Korea was highly depressed across Q2 and market participants expect low demand and weak scrap prices to remain until the end of Q3.

A Japanese trader stated that "we are afraid of the same situation in 2016 reoccurring with [large outflows of] Chinese billet; with the South Asian scrap market dependent on Chinese billet, I feel Q3 might be negative for scrap business."