Intensifying Losses Of Steel Mills Plus Declining BF Operating Rates, How Much Further Will Steel Price Go Down?

SHANGHAI, Oct 13(SMM) – Insiders frequently mentioned refraining from selling for higher prices and intensifying steel mill losses. Entering in mid-to-late September, steel mills’ profit margins continued to shrink. As the prices of raw materials such as iron ore and coke remain at high levels, especially the expectation of the third coke price hike rose again, coupled with poor market demand, profit margins of steel mills continued to shrink and losses worsened during mid-to-late September. Many steel mills decided to suspend shipments in response to the drop in steel prices and implement price limits. Some steel mills said that if profit improvement doesn’t show, they may reduce production for maintenance.

The domestic average prices of rebar and HRC had seen an overall decline since September 19

According to the SMM quotation, the domestic average price of rebar was reported at 3,789 yuan/mt on September 19, and then it maintained a downward trend. On October 11, the average price was reported at 3,668 yuan/mt, which dropped by 121 yuan/mt in less than a month, a decrease of 3.19%. The domestic average price of HRC also continued to decline since it was quoted as 3,935.1 yuan/mt on September 19. On October 12, its average price was reported at 3760.2 yuan/mt, down 174.9 yuan/mt in less than a month, a decrease of 4.44%.

Raw material prices remained high, while market demand was poor, leading to worse steel mills’ losses

In mid-to-late September, two rounds of price hikes from coking coal companies were implemented successively. As the prices of raw materials such as iron ore and coke remain at high levels, especially the expectation of the third coke price hike rose again, coupled with poor market demand, profit margins of steel mills fluctuated downward. Profit margins of the steel mills shrank, and the overall profit was between (-300, -50) yuan, while the profit performance of rebar and HRC differed. According to data analyzed by SMM, on October 11, the profit of rebar from BF mills was -250.04 yuan/mt, and that of HRC was -225.04 yuan/mt. Recently, their profit trends showed an overall downward trend, reflecting expanding losses.

Steel mill losses intensified, causing blast furnace operating rate to decline

Due to the recent intensification of steel mill losses, some steel mills successively formulated maintenance plans for blast furnaces. In addition, a large-capacity blast furnace in a steel plant in northwest China continued to undergo technological transformation over long periods, resulting in a significant drop in the blast furnace operating rate. According to SMM research, on October 11, the blast furnace operating rate calculated by SMM was 91.53%, a decrease of 1.63% from the previous period before the holiday. The blast furnace capacity utilization rate was 92.88%, down 1% from the previous period.

Some steel mills refrained from selling in hopes of higher price by arranging year-end routine maintenance

On October 10, three major rebar producers in Hubei, Baowu Group Yicheng Steel Co., Ltd, Baowu Wugang Group Co., Ltd, and Hubei Jinshanglan Iron and Steel Group Co., Ltd, issued notices that the steel mills had begun to suspend shipments from October 10 and sat on inventories for awaiting better price. The lifting time of shipment limitation will be notified. According to SMM, Northwest United Steel Co., Ltd. held a meeting recently and decided that if losses expand again to 50 yuan/mt or more, each steel mill will reduce production by 30% for maintenance. It can be seen from SMM's rebar production scheduling data that some steel mills arranged year-end routine maintenance in October. In addition, intensifying cost losses of some steel mills also influenced the production pace, resulting in a narrow decrease in rebar output in October. The planned output of BF steel mills may hit an annual low in October since the profitability of EF steel mills was average. Most steel mills maintained medium-low production levels.

Market outlook: Although steel prices are expected to hit the bottom in the short term, the decline room is limited

In the follow-up, coal production and supply are expected to increase and peak in the upcoming winter, further diminishing support for steel prices from raw materials. The risk of cost collapse intensified. However, rebar market presented a weak state of supply and demand. Although steel prices are expected to hit the bottom in the short term, the decline room is limited. Considering that the third coke price hike is likely to be implemented, the number of steel plant blast furnace maintenance may continue to expand, coupled with steel mills’ losses expanding and environmental-protection production restriction, BF operating rate is difficult to rise and is expected to drop in the next week.