[SMM steel] worse-billet imports or increased spot price downside risk

Under the continuous fermentation of the epidemic situation, the demand for foreign steel has declined sharply, and the international steel price has dropped obviously, and the billet price in some countries has opened up an obvious gap with that in China. At present, the domestic tax quotation of billet resources from Southeast Asia is about 405-410 US dollars / ton, which is nearly 300 yuan per ton compared with the domestic billet collection cost (in Jiangsu Province, for example, the cost of billet collection is US $462 / ton). The import resource price of billet from Russia is even lower, and the price of FOB is 35 US dollars / ton lower than that of FOB in Southeast Asia. It is reported that some Russian and Indonesian billets have been exported to China.

Figure 1: FOB price trend of Middle East and CIS billets from 2018 to the present

Source: SMM

Imports-there is still room for growth

Since November 2019, due to the mismatch between supply and demand in the domestic rebar market, the national average spot price has increased by 497.4 yuan / ton, the domestic billet price gap has rapidly widened, and billet imports have soared from 174700 tons in October to 863800 tons in December.

Figure 2: billet import situation and main import places in China since 2011

Source: SMM

Data show that from January to February 2020, China's billet imports totaled 1.2036 million tons, an increase of 1.0443 million tons over 2019, which is already at an all-time high. From March to April, considering that the outbreak abroad has led to a widening price gap at home and abroad, foreign steel demand is even weaker. It is expected that in the short term, billet imports still have some room for growth, when the domestic steel supply side will add "new firewood."

As for the development of the epidemic and weak foreign demand, whether it will increase the pressure on domestic trade supply, SMM believes that the impact is very limited-the total volume of exports is very small, it is difficult to pose a threat to the domestic market.

The data show that in 2019, China's total billet exports reached the highest level since 2011-68900 tons. The top five major exporting countries are France (29.12 per cent), India (17.93 per cent), Indonesia (12.87 per cent), South Korea (11.85 per cent) and Japan (6.6 per cent).

Affected by the epidemic situation and the Spring Festival, China's total billet exports fell 58.68% from January to February 2020 compared with 2019. However, in view of the small volume of China's billet exports, even if exports are completely stagnant, the resulting increment of domestic trade supply is difficult to pose a threat to the domestic market.

Fig. 3: the main export places of steel billets in China

Source: general Administration of Customs

Generally speaking, the export restriction of billet in the short term has little disturbance to the domestic spot fundamentals, but it is necessary to guard against the downside risk of the increase of import volume to the spot price. Coupled with the threat of the current spot price trend of the three roadblocks-electric arc furnace steel plant operating rate continues to rise, blast furnace plant hot metal turn thread formed by the supply increment, as well as the current huge social inventory, the spot market is difficult to change in the short term.