LME Week: Chinese steel margins 'sustainable', SMM says

London, Oct 8 (SMM) – Chinese steel prices and margins are likely to be "sustainable" in the near term as demand remains robust from low inventories of steel and high prices, said SMM general manager, Ian Roper. 

Speaking to delegates at the LME week in London on Monday October 8, he said that seasonality in steel shifted due to winter cuts and disrupted demand in north China, especially in the construction sector.

"An expanding push for cleaner air is likely to result in even greater impact from winter cuts in the fourth quarter of the year," he said. While Chinese authorities decided to avoid blanket cuts this year and would give more exemptions to winter curbs for mills who have upgraded facilities, there is also less room for further productivity gains this winter as mills have already been running at maximum output levels all year.

"The key for winter cuts is the exemptions to demand side impacts," Roper said. Government and infrastructure construction may continue in some regions this winter. On a net basis, he expects steel output cuts to exceed demand cuts this winter, which will be supportive to steel prices and margins.

62% Fe ores could feel the brunt of reduced steel output over winter, especially as supply growth this year has been biased to 62% Fe ores, and Australian miners tend to have very strong shipment volumes in the fourth quarter.

While mills will continue to chase high grade ores; direct charge feed, prices of scrap, pellet and high grade ore will continue to do well, Roper believes.

For domestic iron ore, Roper said that output is "losing its elasticity" due to environmental inspections. As output has laready been restricted for much of the year, further losses over winter is less likely.

Roper also identified electric arc furnaces (EAF) as the major long-term threat to iron ore, as the Chinese government pushes developments of EAF on supply-side reforms.