Mills keep margins as met coke offsets iron ore spike
Published date: 05 April 2019
Share: Chinese steelmakers have maintained gross profit margins at around 200-400 yuan/t ($30-60/t) by squeezing metallurgical coke suppliers for price cuts and relying more on lower-cost iron ores.
The loss of 100mn t of seaborne iron ore sales from dam scrutiny in Brazil and a cyclone in Australia has lifted 62pc Fe iron ore prices to two-year highs. Seaborne 62pc Fe iron ore prices have risen by $29/dry metric tonne (dmt) since November. This translates to iron ore cost increases of around $42/t of steel produced, with each tonne of steel using 1.44t iron ore with a 15pc scrap charge.
At the same time, seaborne met coke prices have fallen to around $300/t fob north China from around $400/t in November. This has reduced met coke costs by around $45/t of steel, at 0.47t of coke used per tonne of steel.
The lower coke prices have offset the rise in iron ore prices, so mills' profit margins are not being squeezed by raw material costs, a Shanghai-based iron ore trader said. He estimates local mills' profits at Yn380/t for rebar and Yn440/t for hot-rolled coil (HRC).
Chinese mills are likely saving more than seaborne coke prices because domestic prices have fallen faster.
Tangshan mills have seen average coke costs fall by 28pc to Yn1,830/t this week from Yn2,530/t in late November. At Rizhao port, 62 CSR met coke is trading at around Yn1,950/t this week, down by 30pc from Yn2,800/t in late November, while 65 CSR is trading at Yn2,000/t, down by 31pc from Yn2,900/t over the same period.
Chinese coke makers' margins have been squeezed to breakeven levels, and some operators have been pushed into negative margins. This week some coke plants resisted further price cuts and stepped back from the market, expecting rebounding steel demand to send prices higher in April-May.
Iron ore buyers sidelined
Chinese iron ore buyers are also taking the same attitude to wait out higher prices. Seaborne spot trade slowed this week with only four deals reported to Argus, a fraction of the pace a month ago when 30 deals were reported to Argus on 1-7 March. Rather than rush in to secure more supply, Chinese buyers are relying on smaller portside purchases. Chinese mills could draw down on-site inventories as well as some of the 147mn t of iron ore held at China's ports.
Mills have also shifted to lower-cost iron ore fines to cut costs, but it has sent the lower-Fe ore prices up faster.
Portside prices for Fortescue Metals' 56.5pc Fe super-special fines (SSF) have nearly doubled since October, as their discount to the 62pc fines index narrowed to around 15pc from nearly 40pc. The SSF seaborne equivalent price at $74.95/dmt cfr Qingdao yesterday was up by 93pc from $38.90/dmt in October.
The Argus ICX 62pc fines price at $93.50/dmt cfr Qingdao yesterday was up by 45pc from its recent low of $64.60/dmt in late November, while the 65pc index at $103.50/dmt yesterday rose by 28pc from its recent low of $80.75/dmt in late November.
Mill cost estimates vary
Some mills are not taking into account current spot prices in calculating gross margins.
"We have profits now because the iron ore we are using was bought earlier at a lower cost," an east China mill official said. "But I think in 10-15 days, the sharp increase in iron ore prices will start to pinch on mills' margins."
Argus' profit survey found many estimates align with current spot prices.
A Tangshan trader pegged the profit for local billet producers at around Yn300/t. Tangshan mills are offering billet at Yn3,450/t ex-works. Argus calculates a billet production cost of Yn3,025/t in Tangshan. Deducting the 13pc value-added tax that is included in the ex-works price gives an operating profit of around Yn322/t for Tangshan billet, Argus estimates.
FMG Price at posting:
$7.78 Sentiment: Buy Disclosure: Held
(20min delay)