Iron ore futures moved flattish throughout the trading day and closed lower at the close, due to market concerns over high steel stockpiles.
The most-traded May iron ore contract on China’s Dalian Commodity Exchange (DCE) then fell by 2.03% day-on-day or RMB 20.50 to RMB 990/mt on Friday.
The steel rebar contract on the Shanghai Futures Exchange also fell by 1.39% or RMB 60 day on-day to RMB 4,267/mt.
High steel stockpiles among Chinese mills
Chinese steel stocks continued to swell ahead of the Lunar New Year holiday in February, as construction activities slowed.
According to Mysteel, Chinese mills’ finished steel product stocks hiked up for the fifth consecutive week to 6.3 million mt as of Jan 27, up 5.7% on-week.
Similarly, Chinese traders’ finished steel product stocks also grew by 13.8% on-week to 18 million mt as of Jan 28, comprising of steel products like rebar, wire rod, hot-rolled coil, cold-rolled coil and medium plate.
According to trade sources, the seasonal build-up of steel stocks was typical of the market before the Spring festival holidays, as many construction sites had ceased operations, while workers returned home for holiday celebration.
Lower steel profits from high raw material costs
China’s steel profits dropped by 7.5% on-year in 2020, due to negative economic impact of the coronavirus pandemic, according to data from National Bureau of Statistics (NBS).
The statistics however, showed a strong rebound of profits from May onwards, as the industry recovered from the slump of Jan-Apr 2020.
Since May 2020, the steel margins improved strongly till late December, when the high raw material costs dented mills’ profits and steel demand declined due to the harsh winter period.
Thus, the rebar margins dropped toward the negative region since Jan 11, 2021, especially among the northern China-based mills with margin loss of around RMB 200/mt, while the warmer southern-China based mills still maintained positive margins around RMB 200/mt.