FOCUS: China opens steel export floodgates amid virus woes

Chinese steelmakers are rushing to export their products due to stagnant domestic demand caused by downstream industries struggling to return to work amid the novel coronavirus (2019-nCoV) outbreak in China.

Hebei-based Anfeng Iron & Steel, a mill that had previously focused heavily on domestic sales, exported tens of thousand tonnes of hot-rolled coil in early February, a Shanghai-based trader said.

“It has to do so. Its inventories were mounting amid sparse domestic sales,” he said.

Anfeng Iron & Steel has sold HRC to Vietnam at $455-465 per tonne cfr, which is equivalent to about $443-455 per tonne fob China, according to sources.

They said these had disrupted the market, since other major Chinese steelmakers were offering their products at $495-505 per tonne during the period.

“It was reasonable for other major mills to keep their offers at $495-505 per tonne fob since overseas buyers were trying hard to get Chinese HRC by bidding at $500 per tonne fob,” a Beijing-based trader said.

But it turned out that Anfeng Steel had started a trend. A week later, another major steel mill, Benxi Iron & Steel, lowered its HRC prices to $460-465 per tonne fob.

This week, Tangshan Iron & Steel has concluded export transactions at $450-455 per tonne fob.

“Mills have no choice at all,” the Shanghai-based trader said.

“Anfeng turned out to be among the first to clear its stock of March-delivery products. It later suspended its exports while other major mills rushed in with price cuts of their own in search of orders,” he said.

The most practical solution for steelmakers with a lot of inventory now is to just export their products since they are not receiving orders from their domestic buyers, the trader said.

A source at a Hunan-based mill lamented that he had no sales outlets for his rebar and wire rod inventories, especially after the steelmaker’s January output exceeded its planned production by almost 10%.

The domestic situation is even worse for long steel producers, the Shanghai-based trader said.

“Most construction sites have not been able to resume activities because most of the construction workers come from rural areas and have to be quarantined first. In contrast, flat steel buyers are allowed to resume work quicker," he said.

The stagnant domestic demand has dragged down China's HRC prices significantly compared with other countries.

China’s HRC export offers are now at around $465-475 per tonne cfr Vietnam, about $45-50 per tonne below the $515-520 per tonne cfr offered by suppliers in India, a second Shanghai-based trader said.

“There's no doubt that Chinese prices are very low, but steel mills can still turn a profit,” a Beijing-based trader said.

Anfeng Steel have been selling limited quantities to the domestic markets at 3,230-3,270 yuan per tonne, which is equivalent to an export price of $440-445 per tonne fob China.

“Anfeng will prefer to export HRC rather than sell domestically as long as overseas buyers are able to accept prices above $440 per tonne fob,” the Beijing-based trader said.

Weak domestic demand
Market sources believe that most downstream companies are operating at low rates, judging by their domestic steel sales of only a third of levels before the epidemic.

This is despite China’s National Development & Reform Commission spokesman Tang Shemin saying that over 50% of the industrial companies had resumed work in major locations such as Shanghai city, and the provinces of Guangdong and Jiangsu.

A worker at a Wuxi-based auto parts maker owned by a Japanese company said that although the company had resumed work since February 17, only a few production lines out of several dozens were in operation.

While local authorities had allowed steel mills to resume their operations from February 10, most market participants only returned from February 17, the second Shanghai-based trader said.

“Market participants are also now working from home rather than at the office,” he said.

This is especially after a Chongqing-based titanium producer was forced to suspend operations from February 10 after it reported two coronavirus infections. A total of 131 employees were quarantined.

“So it is very high-risk to resume work now,” the auto parts worker in Wuxi said. “The most urgent task is to ensure that the virus does not spread, rather than generating profits.”

Japanese financial services company Nomura has lowered its 2020 forecast of China’s gross domestic product growth to 5.5%, compared with 5.6% previously.

“We expect a V-shaped recovery to follow containment of the epidemic on pent-up demand and production,” it said in a recent report. It expects the Chinese government take put in effort to help companies, especially small and medium-sized ones, to resume work in the near future.

Shipping restrictions
By February 17, over 50 countries and regions worldwide have increased their scrutiny of Chinese cargoes and have imposed mandatory quarantine periods on them to stave off further infections.

This becomes another factor that Chinese steelmakers have to consider.

Vietnam, a key market for Chinese steel, requires China-origin cargoes shipped in the last 14 days to undergo quarantine. South Korean ports also require sailors to undergo health inspections before they are allowed ashore.

A source at a mill in northern China said it had not encountered any problems with shipping steel to other countries since steel products were unlikely to spread the virus compared to livestock or agriculture products.

“But we will keep an eye on it. I heard some overseas companies have cancelled orders for China-origin materials after their government banned the use of products from China,” the first Shanghai-based trader said.

Chinese exporters have incurred significant losses since the outbreak, with more than 350,000 containers removed from global trade since, the Wall Street Journal reported.

“But steel exports could be exceptional,” the trader said. “At least in the short term, when there is a price advantage and weak domestic sales, exports will remain active.”

Miranda Song

miranda.song@fastmarkets.com

Published

Miranda Song

February 20, 2020

06:30 GMT

Shanghai