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Chinese steel, iron ore prices slump as bear factors weigh on futures, physical markets

Highlights

Rebar, HRC futures lowest since Feb

Iron ore futures lowest since May 2020

Markets seen overcast in Q4

China's steel and iron ore prices slumped to multi-month lows Nov. 2, dragged by the declines in both the futures and physical markets, on the back of production cuts, power issues, falling steel demand, and an oversupply of iron ore; among others.

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On the Shanghai Futures Exchange, the most actively traded January 2022 rebar contract fell Yuan 279/mt day on day Nov. 2 to its lowest since Feb. 3 at Yuan 4,230/mt. Likewise, the most actively traded January 2022 hot-rolled coil contract ended the Nov. 2 trading session at Yuan 4,601/mt, its lowest since Feb. 19, down Yuan 225/mt from Nov. 1.

The weakness in the futures markets had impacted Shanghai's physical spot HRC market, pulling the Q235 5.5 mm grade, ex-stock including value added tax down Yuan 220/mt on the day to Yuan 5,000/mt ($781/mt), its lowest since March 23.

Beijing's spot rebar was also not spared, as it ended Nov. 2 at Yuan 5,200/mt ($812/mt) ex-stock actual weight, including VAT, for 18-25 mm diameter HRB400 grades, down Yuan 60/mt on the day. Its lowest since Aug. 19.

Market sources scrambled to find reason for the Nov. 2 slump, with some attributing the correction in iron ore prices weighing down on steel products, while others said the opposite could also be true.

Iron ore sees oversupply issue

On the Dalian Commodity Exchange, the most actively traded January 2022 iron ore contract fell to Yuan 565.50/mt Nov. 2, down Yuan 53/mt from Nov. 1; its lowest since April 2020.

Iron ore inventories at major Chinese ports have been building up since July, in lieu of production cuts needed to meet China's 2021 crude steel targets.

According to industry sources, inventories were well over 144 million mt by end-October.

"In contrast, there were around 130 million mt of port stocks during the same period of 2020. We might hit 155 million mt by end-2021," a Singapore-based iron ore trader said, adding that the bearish steel demand outlook would only serve to support the oversupply of raw material.

Super special fines, a liquid spot iron ore brand for Chinese port side markets and considered the most appropriate to deliver to the DCE, traded at a 42% discount against its 62% benchmarks in November, its widest discount since December 2018.

Following the Nov. 2 slump on DCE futures, which almost touched its daily movement-limit of 10%, the physical market fell silent as buyers were spooked into a wait-and-watch mode.

The outlook for iron ore for the remainder of this year was lackluster, with sources attributing the fall in steel prices, and its resultant negative margins, as a major contributor to lesser demand for the raw material.

Steel's overcast Q4 market

"Whatever the reasons for the crash, whether led by raw material, or the other way round, one thing is certain, it is a downward spiral," a Hebei-based steelmaker said. "Steelmakers are facing heaps of pressure coming from many directions. We have to accept that demand for steel is on a downtrend."

Adding to the woe is China's impending winter. Not only is it typically the slowest season for China's steel industry, winter is also expected to be colder than usual this year.

The winter snap is likely to add further pressure on the country's ongoing power crunch, given that power has already been curtailed in at least 20 provinces.

Since September, China's steelmaking industry was stung by a power crisis, which had hit both steel production and demand.

This was felt in at least 12 provinces, including Heilongjiang, Inner Mongolia, Shandong, Jiangsu, Zhejiang, Sichuan, Guizhou, Yunnan, Guangdong and Guangxi, according to market sources.

Downstream manufacturing sectors were also not spared from the power cuts, which coincided with the global shortage in semi-conductor chips, causing steel demand to double down.

"We not only have to reduce output because of power rationing, but also to hit China's 2021 steel production targets," a Jiangsu-based steelmaker said, with respect to the nation's aim to keep its 2021 crude steel output within its 2020 level of 1.065 billion mt.

Another factor chipping away on steel demand is its slowing growth and tightening credit loans.

Concerns over borrowers' ability to make repayments, particularly in the real estate sector, following debt crisis at major Chinese corporates could force banks to tighten credit, and in turn slow construction activity.

Meanwhile, China's efforts to ensure blue skies during the Beijing Winter Olympics over Feb. 4-20, 2022 has also cast a shadow over the steel industry. The country's push to curb pollution could translate to steelmakers having to limit output yet again, but this could cushion any price fall.

Given this slump, market expectations of a rosy Q4 are kept at bay and seemingly more so out of reach, as the decline in steel demand is likely to outstrip the drop in production.