Baosteel Cuts November HR Price

Posted on 13 October 2020

Baosteel has slashed its November list price for HR products by RMB100/ton and frozen prices for CR and plate. High distribution inventory levels and slowing domestic distribution price hikes serve as the background for Baosteel’s HR price cut. At yearend, steel prices should receive support from a decline in crude steel production in China. Going forward, high inventory levels and expectations for demand recovery in 2021 are to be important variables governing steel prices.

Baosteel cuts November HR price by RMB100/ton due to high inventory levels

China’s Baosteel (600019.SH) has cut its November domestic list price for HR products by RMB100/ton and frozen prices for CR and plate. We note that Baosteel has consistently raised its HR distribution price on a monthly basis since June, when the Covid-19 crisis began calming down in China. The November price cut represents the first decline in six months. Meanwhile, having increased steadily from RMB100/ton to RMB280/ton from July, the CR price is to remain frozen in November.

As background, we recall that Baosteel’s September announcement of price hikes was justified by the prediction that greater automobile production in 2H20 would support CR prices. Although there is no significant change in the firm’s view, we believe that the November price decisions have been motivated by: 1) higher than usual steel inventories in China; and 2) recent distribution price decline. As of Oct 8, the steel distribution inventories of 35 major Chinese cities totaled 15.51mn tons (+37.8% y-y). By product, rebar and HR inventories were up 72.3% and 20.9% y-y, respectively. However, CR distribution inventories have remained flat y-y since end-June. In September, domestic steel distribution prices in China fell 3.7% for HR, 2.6% for rebar, and 1.5% for plate.

Strength of China’s yearend steel production cuts and expectations for 2021 demand recovery are key to steel prices

As of Oct 2, China’s blast furnace utilization rate (based on 163 sites nationwide) came to 68.1%, showing ongoing decline from the yearly high of 71.3% logged on Aug 13. While the average daily crude steel production of China’s key players in late September totaled 2.19mn tons (the highest level of the year), we expect the figure to shrink moving towards yearend. Although China’s policy of regulating winter season steel production (which should come into effect soon) may support steel prices at the end of the year, important variables will remain in play, including: 1) the strength of such steel output reductions; 2) currently high steel inventory levels; and 3) expectations for steel demand recovery in 2021.

On Oct 10, the prices of iron ore and hard coking coal came to US$124.8/ton and US$132.3/ton, respectively. Against this backdrop, we expect blast furnace operators to face rising cost burden (q-q) in 4Q20. Meanwhile, domestic steel players are working to secure profitability via ASP hikes. We note that inventories of imported iron ore at major Chinese ports stood at 120.61mn tons as of Oct 5, marking the first instance of y-y growth this year. We expect iron ore prices to stabilize downwards moving ahead, given China’s winter steel production cuts and Vale’s production expansion plans.

Source : Business Korea