Operating rates across EAF steelmakers to extend drop in Jul as higher costs erode margins

SHANGHAI, Jul 9 (SMM) – Chinese electric arc furnace (EAF) steelmakers who use steel scrap, rather than iron ore, as feedstock are expected to further scale back operations in July as higher prices and tight supplies of steel scrap pushed them to the verge of losses.

An SMM survey showed that the average operating rate across 33 EAF steelmakers is expected to fall 7 percentage points to stand at 72% in July, after they dropped 1 percentage point in June.

Such steelmakers could see a profit margin of 6.72 yuan/mt as of Monday July 8, based on steel scrap with a tax-included price of 2,330 yuan/mt, showed SMM calculations. This was down 45.78 yuan/mt from June’s average of 52.49 yuan/mt and 216.4 yuan/mt from May’s 223.1 yuan/mt.

Prices of steel scrap grew faster than steel prices. This, together with tightness in scrap supplies, has put mills, except those in east China, on the brink of negative profits.

Steel scrap prices gained 120 yuan/mt from a month ago to stand at 2,330 yuan/mt as of July 8.

Margins across mills in Jiangsu and Zhejiang currently stand at 100 yuan/mt, while those in Guangdong saw losses of around 40 yuan/mt in the middle of June.

The SMM survey also showed a decrease in operating rates across Chinese steel mills who purchase billets as raw materials this month. The average rate is expected to slip from June’s 74% to 72%.

Those mills are also frustrated by higher costs, which expanded 120 yuan/mt from a month ago to 3,970 yuan/mt in the north as of July 8, with Tangshan billet of 3,620 yuan/mt.

Costs in the east saw a larger decline of 200 yuan/mt, falling to 3,950 yuan/mt with Xuzhou billet of 3,700 yuan/mt.

Northern mills have significantly slashed production since late June, as Tangshan intensified anti-smog measures.