Low season continues to grow hot-rolled steel coil inventories

SHANGHAI, Aug 17 (SMM) – Overall hot-rolled steel coil (HRC) inventories across China continued to increase this week as the low season lingered, SMM research found as of Thursday August 16.

Overall stocks, including social and in-plant volumes, rose 0.8% over the week to 3.23 million mt as of August 16. This is up 5% from the same period last year.

Inventories at mills nudged up this week as sluggish demand kept buyers cautious in making purchases. Inventories across mills came in at 989,100 mt, up 0.4% week on week and 10.5% year on year.

New production cuts and shrinking profits also weighed on HRC production at mills this week.

Sintering machines and shaft furnaces in Tangshan were required to halve production due to heavy pollution This requirement was in addition to the city’s current pollution improvement effort, which required steel mills to limit operations from July 20 to August 31. The Tangshan government also raised cuts on mills in Fengnan and Guye districts to 50% earlier this week.

Profit margins for HRC production continued to shrink, down some 9% over the week, as prices of raw materials grew. Metallurgical coke prices increased 100 yuan/mt from a week ago to 2,270 yuan/mt as of Thursday.

In addition, mills stepped up their rebar output to chase higher margins, which also suppressed some HRC output.

Stocks at social warehouses stood at 2.24 million mt, up 0.9% from a week earlier and 2.7% from a year earlier. Social inventories have risen for five consecutive weeks.

While growing HRC inventories reflected weak demand, spot prices remained at high levels, buoyed by robust prices of futures and fiscal stimulus. Trading activity, however, was lukewarm.

SMM calculations showed that traders are now operating in profits. In the Shanghai market, HRC prices averaged 4,302 yuan/mt this month with costs for July resources at 4,252 yuan/mt, indicating a healthy margin of 50 yuan/mt.This margin, and eased cash pressures, encouraged traders to hold their offers firm.

SMM expects HRC prices to strengthen in the short term with new supply pressures. Shanxi and Shandong provinces began provincial environmental probes from mid-August and this could weigh on output of HRC.