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Trade Review: Global steel imbalances present export opportunities in Q2

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Trade Review: Global steel imbalances present export opportunities in Q2

Highlights

Soaring US and EU prices attracting Asian imports

Steel output should start to recover from late Q2

Indian exports squeezing domestic supply

Melbourne — This report is part of the S&P Global Platts Metals Trade Review series, where we dig through datasets and digest some of the key trends in steel, iron ore, metallurgical coal, scrap and alumina. We also explore what the next few months could bring, from supply and demand shifts, to new arbitrages, and to quality spread fluctuations.

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Acute coil shortages in Europe and the US have resulted in steel prices reaching their highest level since 2008 and attracting export interest from Asian mills -- and the situation seems unlikely to change until steel production picks up from the second half of the year, meaning export opportunities will prevail in Q2.

US Midwest hot-rolled coil prices have risen by 33% since the start of the year, while prices in northern European have surged 36.5%, S&P Global Platts data shows. Delivery lead times have blown out in both markets, with many customers unable to secure steel in the current quarter. The US expects imports to start picking up in summer, which could help ease supply tensions.

The dramatic steel price rise in the US is largely seen as being supply rather than demand driven, with automakers struggling with the semiconductor shortage. In Europe, downstream demand is firmer but large producers such as ArcelorMittal have been offering delivery times as far out as October. Steel prices in Europe and the US are expected to continue rising in Q2, further supported by COVID-19 vaccination programs helping their economies to recover.

South Korea is exempt from the US government's 25% import tariff on steel and has been lifting its shipments there. Japan is impacted by the tariffs but has long-term contact arrangements with its US-based automakers and other customers of high-end steel. Japan's Ministry of Economy, Trade and Industry, or METI, has forecast that Japan's exports will rise around 21% on year to just under 7 million mt in Q2.

China export jump unlikely to last

China has stepped up its involvement in the export market this year as the demand and price recovery in overseas markets makes Chinese steel competitive again. The country's finished steel exports over January-March rose 24% on year to 17.682 million mt, but should moderate to around 4.5 million mt/month from May, Platts Analytics estimates.

Platts Analytics continues to forecast China's finished steel exports will be 65 million mt in 2021, up 11 million mt or 21% from 2020.

The rise in China's March steel exports can also be attributed to exporters rushing to ship products before April, when China was expected to cut or remove steel export rebates in an effort to decrease exports and indirectly discourage steel production. But given rising international prices, Chinese steel exports would be viable even if the entire 13% export rebate was removed.

China's domestic HRC prices have risen around 20% since the start of the year. Plans to reduce steel output in the northeastern city of Tangshan for environmental reasons further supported prices. Platts Analytics does not expect any big fall in overall steel output this year as mills in other parts of the country will lift their capacity utilization rates.

China's steel mill margins have been strengthening this year, reaching a two-year high in the case of rebar. Domestic HRC margins hit a year-to-date high of $147/mt April 14. With profits this high, mills will be reluctant to trim production. Platts Analytics expects steel demand to start to ease in H2 as government monetary-tightening measures start to take effect, particularly in the property sector. However, as rising house prices in Q1 indicate, it remains a challenge to cool China's housing market. Property accounts for 30%-35% of China's total steel consumption.

Also in the Platts Metals Trade Review series:

India targeting EU

India continues to play a bigger role in international steel trade; its steel exports over April-February rose 49.5% on year to 15.5 million mt, according to Joint Plant Committee data. Last year India exported significant volumes of steel to China and Vietnam at a time when India's economy had yet to recover from the pandemic. This year India has largely switched its "swing supply" focus to Europe. Northern European HRC prices were around $65/mt higher than Indian domestic HRC prices in early January. As of April 12, they were $300/mt higher. India has already exceeded its EU quota by around 40,000 mt this year but is hoping the steel will be allowed in quickly given the coil shortage in Europe.

The knock-on effect is that Indian domestic steel supply has become even tighter, which is set to be compounded by planned maintenance works at JSW Steel, Tata Steel and the Steel Authority of India Ltd. This follows a fall in crude steel production of 3.1% on year to 9.1 million mt in March.

This will likely see Indian HRC prices rise further over April-May before starting to ease with the onset of monsoon season, which slows downstream activity. Unlike their counterparts in China and Japan, Indian manufacturers are struggling to pass on rising input costs to their customers.

Steel supply response disappointing

China aside, crude steel production has been slow to ramp up post lockdowns in key countries and regions. Europe's output fell 7.1% on year in March, North America's by 8.9% and India's by 8.6%, according to the World Steel Association. In the US, mill capacity utilization rates are still only around 77%, compared with 80% in March last year before the pandemic took hold. Japan's METI forecasts the country's crude steel production at 23.24 million mt in Q2, down from 23.67 million mt in Q1.

Steel supply should start to ease toward mid-year as production is restored. Demand should strengthen in most countries on the back of government stimulus programs. But the pandemic remains a negative influence until vaccination programs are widely rolled out. The Biden administration's stimulus measures should drive demand in the US, but the semiconductor shortage is expected to last for most of this year.

There are now more moving parts than ever in global steel markets, and with supply and demand often out of kilter, export opportunities will undoubtedly continue to present themselves in Q2.

Platts Metals Trade Review: Steel | Iron Ore | Met Coal | Ferrous Scrap | Alumina