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Chinese steelmaking cuts hammer market

Chinese domestic market strength and reduced export volumes have been a primary driver of the global steel and iron ore rally this year. But there are growing signs that dark clouds are gathering over the world's largest steel market.

Shanghai Futures Exchange rebar and Dalian Commodities Exchange iron ore futures have taken a bath over the last few weeks, driving bearish sentiment in the physical steel market. The S&P Global Ratings downgrade of China pushed them markedly lower September 21, with the move also filtering into less-liquid London Metal Exchange scrap and steel swaps -- LME rebar was off almost $30/mt for the front month the same day. Like Platts, S&P Global Ratings is owned by S&P Global.

Chinese hot rolled coil export prices came off $13/mt September 22 to $560/mt, meaning the price has fallen $36/mt from $596/mt FOB on September 8, according to S&P Global Platts data. Rebar prices have edged off marginally, but remain supported despite the more than 3% contraction in cement output during July. Platts assessed FOB China rebar at $546/mt September 22, down from $562/mt on September 8.

Mill gross profits per ton are at or near a multi-year zenith, with rebar makers amassing almost Yuan 1000 ($151/mt) on domestic sales, despite the recent softening, according to data from Morgan Stanley. Hot rolled margins are slimmer, at Yuan 683 ($103/mt), but still pretty handsome by historical standards.

What is driving the selloff is Beijing's decision to halve Hebei-Tianjin steelmaking over November-February. This is pushing iron ore and coal lower as it will inevitably impact consumption, if enforced unilaterally. Morgan Stanley said Monday, September 25, the cuts could hit 25 million mt of steelmaking, and thus 40 million mt of iron ore demand, restating its estimate of $55/dmt CFR for 62% Fe ore prices in Q4.

The impending winter cuts, combined with mills' grandiose margins, have pumped up high-grade demand and pricing in recent months with producers striving for productivity. But Barclays Capital suggests the drawdown in port-stocks of iron ore could be evidence of a move away from productivity amid slower steel demand and building product inventories.

Indeed, Platts' daily lump assessment also softened September 22, falling $0.0055/dry mt unit to $0.4190/dmtu, with sources citing increased lump arrivals at ports in the coming months as dampening demand.

The fourth quarter saw steel stocks build in China last year, before they were run down in the first quarter, and post-Golden Week also sees mills ramp up prices, as a rule.

But HRC mills are getting hungrier to sell amid anemic buying, both at home and overseas, sources suggest. And Chinese sellers have re-entered the export market for "square bar" as construction sites have started to shut in the north, leaving more merchant semis for sale out of Tangshan as finished product demand abates.

The stringent efforts to reduce pollution could also reduce downstream steel demand, as construction and infrastructure activity declines, according to some.

Nevertheless, analysts say the output cuts should support steel, unless Beijing implements fresh measures to curb steel demand.