China’s all too apparent slowdown is all the rage. The Shanghai Composite lost more than a fifth of its value over the five days to Wednesday August 26, with record one-day plummets witnessed Monday and Tuesday.
China’s steel industry, which in recent years seemed to become untouchable as it shipped product the world over, is now gaining more attention from importing countries and soon could also feel the crunch of recent market changes.
The People’s Bank of China announcing capital reserve cuts and lower interest rates seemed to do little to change the tide, as was the case with the previous interest rate cut announcement in June — then the Shanghai Comp shed more than 3%, compared to 1.27% Wednesday. Macquarie Bank said the reserve and interest rate cut would release as much as Yuan 700 billion ($109 billion) into the country’s financial system.
On Wednesday the PBoC said it would inject a further Yuan 140 billion into the financial sector to bolster liquidity; since Beijing devalued the yuan, capital has been exiting the country. Some say China has been one of the biggest ever beneficiaries of the carry trade; that is, where investors borrow money at low interest rates to invest elsewhere (in this case risky/higher return assets in China) in the hope of higher returns.
With the current environment — namely a weak yuan, a relatively strong US dollar, uncertainty in China and lower interest rates — that trade is looking likely to unwind to some extent, with the process already underway.
Should capital flight continue, which some say is unlikely given the central bank’s amount of foreign currency reserves, the ferrous markets will start to tremble. China’s structural steel surplus and rampant exports are as well publicized as its economic issues.
The recent fall in the yuan has already had an impact on offers of semis and finished products the world over. Seaborne hot rolled coil prices in Asia are at the lowest levels since Platts began its assessment in January 2006. Platts assessed commodity grade SS400 HRC, of 3 millimeters thick, at $296/mt FOB China Wednesday.
Commodity grade HRC prices into Antwerp have fallen Eur17.50/mt since the yuan devaluation, to Eur330/mt as of Tuesday (August 25). HRC offers into the small UK market are down about GBP 15/mt over the same period, last assessed at GBP302.50/mt DDP Friday (August 21).
Prices of scrap imported into Turkey — the world’s largest market for seaborne scrap — are under pressure from cheap Chinese billet prices, and hyper-competitive offers into its traditional end markets.
Producers worldwide are pushing for trade barriers to protect their markets and alleviate intense margin pressure, in what some see as a growing regionalization of the modern steel market.
The US has launched a slew of trade cases against imports of flat products targeting many countries. Europe is investigating Chinese rebar and hot rolled coil imports, with plate potentially also on the horizon — US sources also think plate could be targeted in a fresh trade filing. Pakistan, Turkey, Australia and a host of other nations have also started to investigate imports of Chinese steel for potential dumping.
If volatility continues in China, and the yuan depreciates further, the times — to paraphrase Bob Dylan — could be a changin’.
source: Platts
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