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China's Steel Mills Feel Margin Crunch: Bodes Ill For Iron Ore


Post Date: 18 Jul 2015    Viewed: 571

“Record low” is not exactly the phrase you want to hear when discussing the topic of profitability.

But that’s the grim reality confronting China’s steel mills as margins are getting crushed amid a slide in demand, with analysts expecting more pain for hot rolled coil (HRC) prices to come. But the pain is being felt beyond China’s borders as iron ore producers in Australia and Brazil endure near decade low prices for the steel making ingredient as too much supply collides with waning demand from China’s unprofitable steel mills. Check out this blog for a closer look at why there could be more downside for iron ore prices.

The lamentable state of affairs in China’s steel industry is underscored by a recent survey of 163 mills by consultancy Mysteel that showed the percentage of profitable mills had dropped from 60% in April to just 4%. That’s right, just 4%. Here’s HSBC explaining the dynamics of the industry’s margin crunch:

Due to the sharp fall in steel prices, the Chinese steel sector’s profitability has deteriorated significantly so far this year. The spread between Chinese HRC prices and iron ore and coking coal prices, which we use as a rough indication of steel conversion margin (we take 0.7 times the Chinese coking coal prices and 1.6 times the iron ore price assuming four weeks of inventories), has slumped by 40% from USD239/t at the start of the year to a historical low of USD142/t now.

And the broker expects further downside for HRC prices and ongoing pressure on the margins and returns of China’s steel mills:

Although average spot HRC prices have fallen by 27% so far this year to a record-low USD313/t, we don’t expect them to rebound meaningfully anytime soon given 1) weakening demand in the summer slow season; 2) lower cost support following the recent iron ore price retreat; and 3) destocking pressure at mills. Baosteel’s recent price move appears to support our view – it has announced to cut its August ex-factory HRC prices by RMB200/t. We expect other mills to follow suit to catch up with a spot market that has fallen through the floor. We see no upside to steel prices and think poor steel prices will continue to weigh on Chinese mills’ margins and returns. 


Superhard Material of China

Superhard Material of China

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Abrasives and Grinding Products of China

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Coated Abrasives of China

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China International Abrasives & Grinding Exposition

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