Trade review: China's steel winter balancing act to decide Asia's fortunes

This is Part 3 of 5 in the S&P Global Platts Metals Trade Review series, where we dig through datasets and digest some of the key trends in metallurgical coal, iron ore, steel, scrap and alumina. We also explore what the next few months could bring, from supply and demand shifts, to new arbitrages, and to quality spread fluctuations.

China's balancing act in supporting steel demand on one side and curbing output on the other may determine the fortunes of regional markets this winter.

Its looming step onto the highwire comes after China single-handedly held up global steel prices with its rare buying spree in summer and autumn.

Winter sees a number of seasonal factors come into play in China, like softer construction demand, mandated steel output cuts to combat pollution and, at its tail end, restocking ahead of the Lunar New Year, which falls on Feb. 12 in 2021.

The seasonal effect on steel prices has likely been overstated in recent years, an analysis of China's hot rolled coil and billet prices over the autumn and winter quarters of the past five years shows.

The average price of HRC on an ex-stock Shanghai basis in the winter months of November-January rose in three and fell in two of the past five years compared with autumn's August-October, S&P Global Platts data showed. In Tangshan billet winter prices fell in three years and rose in two.

Apart from 2016 and 2018, the percentage change in quarterly price movements has mostly been in the low single-digits in either direction, indicating that winter alone did not play a significant role in determining price direction.

In 2016, winter prices for both HRC and billet surged more than 20% from autumn amid the Chinese government's crackdown on induction furnace capacity.

In 2018, prices fell more than 10% due to Beijing's focus on deleveraging and credit tightening, plus looser enforcement of winter output cuts as it sought to strike a balance between bolstering growth amid trade tensions with the US and averting the formation of asset bubbles.

It is against this backdrop of government-led macro policy drivers that steel prices have shown meaningful fluctuations in winter over the past five years.

China single-handedly held up global #steelprices with its rare buying spree in the summer and autumn. Will Chinese #steel prices this winter average higher or lower than in autumn?@PlattsMetals latest #tradereview: https://t.co/52sYK66riT

— Platts Metals (@plattsmetals) October 21, 2020

Looking at policy imperatives this year, the "dual circulation" strategy, of which further details are expected to be announced in late October, should ensure sustained support for steel demand due to its focus on growing domestic consumption and urbanization.

On the other hand, questions have been raised about the extent self-restraint could play in the "external circulation" part of the strategy, in which some overseas projects of the Belt and Road Initiative could be pursued with less fervor, reducing consumption of steel produced by Chinese mills.

Also creating the conditions for greater domestic steel supply are this year's winter production cut policies, which market participants expect to be enforced less strictly than usual in northern China, partly because steelmakers have improved environmental protection practices and facilities, and due to the .

All in all, China's status as a net importer of steel – something it has attained for the first time in 11 years since June – will likely lapse in Q4 after recent corrections in domestic prices, and as a recovery in demand in economies like India closes arbitrage windows.

Also in the Platts Metals Trade Review series:

• Met coal prices rebound from multi-year lows as Q4 outlook firms
• Soaring iron ore prices bring buying flexibility to the fore
• Alumina anticipates calm Q4 after bumpy Jul-Sep
• Ferrous scrap eyes firmer Q4 on steel recovery, slower collection

BILLET STILL VALUABLE

Southeast Asian billet, however, could continue to feed China's demand for imports. As recently as Oct. 7, at the end of China's week-long holidays, Vietnam's Hoa Phat Steel sold 20,000 mt of November shipment billet to China, with subsequent cargoes sold Oct. 10, spot market data compiled by Platts showed.

In fact, spot billet transactions on a CFR China basis observed by Platts in Q3 were down only 15% from Q2 to 1.1 million mt, numbering 40 deals compared with 43 in Q3.

India accounted for 5 of those 40 deals, down sharply from 26 of the 43 deals in Q2, making way for Vietnam to emerge as an alternative supplier with 19 deals in Q3, up from one in Q2.

Vietnam's share gain in Q3 was partly the result of weaker domestic rebar prices, which fell to Dong 10,117/kg in Q3 from from Dong 10,311/kg in Q2 and hovered around Dong 10,000/kg for most of July and August, Platts data showed. The prices are on an ex-works basis for 12-20 mm diameter material, excluding VAT.

More importantly, Vietnamese material made headway into China because offers for competitively priced billet from India dwindled due to the reopening of its economy after a nationwide lockdown to contain the coronavirus pandemic.

Even though Vietnam's coronavirus containment was well-managed, its larger producers Hoa Phat, Formosa Ha Tinh Steel and An Hung Tuong Steel remain partly reliant on exports, especially within Southeast Asia.

Given that some traders are buying physical billet while locking in prices on Chinese rebar futures, China's imports of Vietnamese billet may continue into Q4 until arbitrage opportunities arise.

INDIA SHIFTS FOCUS

India's billet exports shrank in Q3 as its domestic economy recovered and its exports of HRC dried up, with the last deal seen Sept. 4, Platts data showed.

The observed volume of Indian-origin HRC deals slumped 68% to 353,000 mt in Q3 from 1.1 million mt in Q2, just as prices of HRC delivered to Mumbai rose to an 18-month high at Rupees 42,000/mt ($572.37/mt) excluding GST in the four weeks to Oct. 7.

India's reduction in steel exports may be surprising, given it reflects an apparent rebooting of its economy even though a COVID-19 resurgence has given it the second-highest infection count globally and third-highest death toll.

But it is eschewing total lockdown this time after the earlier attempt failed to staunch the spread of the virus, but cost the economy dearly.

As showcased in the playbooks of China and many others, infrastructure investment is one way India hopes to counter the impact of the pandemic on its economy.

Its Oct. 12 announcement of a Rupees 250 billion expenditure on roads, urban development, water supply and defense infrastructure may not translate into greater steel demand in the short to medium term given the time needed for formal approvals, planning and procurement, but should go some way toward ensuring greater domestic steel demand – and curtailing exports – in the coming year or two.

Next in the Platts Metals Trade Review Series: Alumina anticipates calm Q4 after bumpy Jul-Sep