TRADE REVIEW: Asian steel, scrap brace for mixed Q4 on looming China stimulus hopes, demand woes

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.

Asia-Pacific steel and scrap prices looked set for a mixed Q4, with expectations of more stimulus measures from China likely tempered by muted demand and increased output.

The initial unveiling of the broad measures by Chinese policymakers led to exuberance in the stock market before the weeklong Golden Week holiday, pushing the major index higher by about 30% during the week, measured by the SPDR S&P China ETF.

But the price rally quickly lost steam after the wide-ranging briefings by China’s finance ministry on Oct. 12 and China’s housing minister Oct. 17 fell short of market expectations due to the absence of additional concrete details around fiscal stimulus.

Ex-China participants, who were cautiously optimistic about the spillover effects on steel markets, said that prospects of significant demand recovery were less bright this time, considering the influx of Chinese steel exports that have triggered a series of trade barriers against domestic steel.

China’s steel exports are expected to reach 100 million mt in 2024, the highest since 2016, due to persistently weak local demand and increased production, according to market sources.

“The output of Chinese mills is too high for domestic consumption. I think the increasing protectionist measures against Chinese steel will weigh on the market in the coming quarter,” a China-based trader said.

Chinese HRC prices fall below rebar

Hot-rolled coil prices in Asia fell to a seven-year low in Q3 before rebounding end-September following the latest stimulus measures.

Asian SS400 HRC prices fell $236/mt from its year-to-date high of $672/mt FOB China March 17 to $436/mt Sept. 8, before rebounding $64/mt to $500/mt Sept. 30, according to Platts assessments by S&P Global Commodity Insights.

Notably, domestic HRC prices in China fell below rebar in Q3, largely due to persistently weak demand amid slowdown in the manufacturing industry and high HRC output.

Previously, Chinese mills diverted production from long steel to flat steel due to the relatively healthier demand for the latter.

Chinese HRC was also offered to overseas markets at increasingly competitive prices, prompting antidumping probes from countries like Vietnam -- a top destination for the material.

This will likely alter trade flows in Vietnam, with buyers primarily looking to South Korea and Japan for supply amid fears of potential retroactive duty if the antidumping was implemented.

Some have also resorted to buying wider material, which is outside the scope of the potential antidumping duty.

Recovering longs Chinese output a cause of concern?

Prior to China’s stimulus measures, Chinese billets were seen extending losses.

Chinese billet ex-stock Tangshan VAT-inclusive prices fell to Yuan 2,820 Sept. 6, from Yuan 3,220/mt Aug. 2, rendering Chinese-origin material significantly more affordable than cargoes from other regions.

However, the sharp rebound in Chinese rebar futures in late September and lower billet output led to a swift recovery in Chinese billet prices.

Chinese exporters were also reluctant to sell billet as the production margin was lower than that of other products, according to market participants.

Chinese billet export offers reached $450/mt FOB China Sept. 26, nearing domestic HRC prices.

However, there are concerns over China's recovering output as rebar production margins quickly rebounded to above zero.

Mills were heard actively shifting flats capacity to produce longs instead, while EAF mills were restarting production on positive mill margins and improved demand.

However, analysts reckoned that rising output will likely weigh on steel prices despite recovering downstream demand.

“In tandem with higher steel prices, market sources expect to see China’s steel production, rebar in particular, to increase faster in October, which might undermine the market’s growth momentum,” said Paul Bartholomew, Commodity Insights' senior analyst for metals and mining.

Ferrous scrap prices see potential signs of support in Q4

Asian ferrous scrap prices extended losses in Q3 amid weak regional downstream demand and cheap Chinese billet alternatives availability.

Platts containerized HMS ½ 80:20 CFR Taiwan index fell to $305/mt Sept. 26, diverging from a recent uptrend in seaborne billet prices. Containerized Taiwanese scrap prices reached a near four-year low of $305/mt Sept. 26.

Chinese billets were heard offered as low as $450/mt CFR Taiwan in the week ended Aug. 16, while the billet-scrap price spread narrowed to as low as $119/mt Aug. 19, rendering billet procurement an economical alternative considering the estimated scrap-billet production cost of $150-$170/mt.

Consequently, Taiwanese mills quickly pivoted to importing billets of Chinese and Russian origin, while a mill in the northern region favored buying vanadium-added billets from South Korea.

Scrap prices could see some support in the near term, as the recent US port strike led to logistical constraints and higher freight rates. That, coupled with October’s higher-than-expected Kanto H2 scrap tender price and Taiwan’s container trucking weight limitations, should aid scrap values, said sources.