China's steel sector profits remain limited in October

The average gross profit margin on rebar sales is around 200-400 yuan/t ($29-57/t) and up to Yn200/t for hot-rolled coil (HRC), with some HRC sellers barely breaking even on sales, according to an Argus survey of mills across China.

A previous survey on 30 May had reported rebar margin of Yn200-300/t and HRC margin of Yn100-200/t.

Average gross profit margins were more than Yn1,000/t for most of last year before profits started to sharply decline from November 2018, persisting through this year.

Mills had largely expected a fall in profits this year compared with record-high levels in 2018. But the extent of the fall has been sharper because of an unexpectedly large increase in iron ore prices.

Cumulative profits in January-August for the ferrous sector were down by 31.3pc to Yn181.7bn, according to latest government data. Cost of production increased by 12.2pc over the same period.

"Our mill is making a profit of Yn200/t on wire rod sales, which is almost flat from September," said the manager of a Tangshan-based mill.

"Billet profits are at Yn100-200/t in Hebei province, but some mills with higher costs have margins below Yn100/t," said the manager of a Hebei-based mill.

"Steel sector profits have not changed much. Rebar profits are around Yn300/t in north China mills," said a Beijing-based ferrous trader.

Mills have kept production rates high through this year as they look to maximise sales and make profits. Production rates are unlikely to fall in the near term unless most mills start to post negative gross margins over the next few months.

China produced 82.77mn t of crude steel in September, up by 2.2pc on the year but down by 5pc from August. January-September output was higher by 8.4pc at 747.82mn t.

There is little possibility of a turnaround in profit margins this year as steel sales typically slow in the November-March winter period. Winter in north China prompts producers to push more material into the southern and eastern regions where the weather is less severe, pressuring prices.

Steel market participants are not expecting any big-ticket stimulus measures to boost economic growth or infrastructure investments over rest of the year, such as a cut in policy lending rates, which may have provided a boost to demand and profits.

Private-sector Jiangsu Shagang today cut its list prices for rebar by Yn100/t reduction on expectations of slower demand.

Apart from slower demand, higher prices of iron ore have also eroded mills' profitability. The average price of the Argus ICX 62pc seaborne index was $94.90/dry metric tonne (dmt) as of 18 October, up by 37pc from the 2018 average of $69.38/dmt.

"We have no profits now," said the manager of a Handan-based mill, adding that the high cost of fines and pellet have dented profits.

Profits for domestic HRC have remained lower than that for rebar as the US-China trade war dents manufacturing exports, while domestic automotive production and sales also remain sluggish.

HRC export prices have fallen sharply over the past few months as Indian producers slashed offer prices to the Asean and European markets.

The Argus-assessed domestic China HRC price ex-warehouse Shanghai has tracked the price of rebar for most of the year, except for a brief period between 13 August and 16 September.

Survey results on rebar/HRC profits:

North China mill: Rebar profit at Yn200-300/t

Tangshan mill: HRC margin at Yn100/t

Trader in Hangzhou: HRC profit at Yn0-100/t

East China mill: HRC profit at Yn100/t

North China mill: HRC profit at Yn200/t

Shanghai-based trader: Yn0/t HRC profit for state-owned, inland mills, Yn100/t for coastal mills

Shanghai-based trader: HRC profit at Yn0-100/t

Hebei-based mill: Rebar profit at Yn300/t

Shandong-based mill: Rebar profit at Yn400/t

Shanxi-based mill: Rebar profit at Yn200/t

Shanghai-based trader: Rebar margin at Yn320/t

East China-based EAF producer: Rebar profit at Yn10-20/t

Jiangsu-based mill: Rebar profit at Yn100/t

Hebei-based mill: HRC profit at around Yn200/t