MySteel Global – China pundits ponder as Shanghai HRC futures plummet

After softening noticeably in this month’s opening week, the most-traded hot-rolled coil (HRC) futures contract on the Shanghai Futures Exchange (SHFE), now as January 2021 contract, took a deep dive on September 9, triggering the concerns among some market participants in and out of China that the tumble might signify the start of a long downward spiral in the the HRC futures market after the continuing gains since March.

The January 2021 HRC contract ended Wednesday’s daytime trading at Yuan 3,752/tonne ($547.7/t) including the 13% VAT, down Yuan 112/t or 2.9% from Tuesday’s settlement price, or lower by a more substantial Yuan 173/t or 4.4% from the settlement price on September 1, SHFE data shows.

Prior to Wednesday’s drop, the contract had been on a steady upward trend since March, according to SHFE’s monthly report.

“Chinese futures markets seem to be falling. HRC was down this week… will it fall more?” a steel trader from Pakistan was asking Mysteel Global for ideas, concerned about whether “a sharp fall” might be brewing.

The trader has been watching Chinese steel futures prices closely, especially the HRC futures, as his country has been importing significant volumes of HRC from China to meet robust demand for welded pipes in Pakistan for many infrastructure construction and property projects.

Meanwhile, an official with a steel mill based in East China’s Shandong province remarked on Tuesday that China’s HRC consumption has been weakening while supply has been rising. “Now the supply-demand relationship has been reversed,” he commented, grumbling that his company has lowered its ex-works prices for hot coil twice recently in the face of low order volumes.

Other Chinese sources cautioned against reading too much into the HRC futures decline however, saying that a downward correction in September is “a common thing”.

Several told Mysteel Global they were strongly confident that the HRC futures price will rebound soon, though they admitted being unsure as to how much the price may decline further in the near term.

“As the (HRC futures) price has barely fallen over the past few months, it is healthier for it to take a downturn sometime, and the start of the month is a perfect timing,” Yang Zhongping, a ferrous product analyst with Soochow Futures commented. He suggested that Wednesday’s fall in the HRC futures might also have resulted from the rippling effect of the plunge in crude oil the prior night.

“Previously, expectations for steel consumption were so strong, but it’s turning out that September so far has not been as good as expected, (which caused futures to soften),” he said. Yet the fundamentals of China’s steel industry give no cause for pessimism, market pundits told Mysteel Global.

“Appropriate short-term downward corrections are necessary, but I am one-hundred-percent sure that prices will rebound later in September or October,” a HRC producer based in North China’s Hebei province maintained.

With the SHFE’s most-traded HRC contract moved to January, a low steel consumption month in China, the price decline is understandable to some extent, noted the Pakistan trader. He also pointed out that the futures market is still in backwardation against the physical market, indicating that overall market optimism leans more towards the shorter term than longer term.

As of September 9, the spot transaction price of Q235 4.75mm HRC in China stood at Yuan 4,007/t, Yuan 255/t higher than the futures price on the same day, according to Mysteel’s database.  

(Written by Olivia Zhang, zhangwd@mysteel.com and Hongmei Li, li.hongmei@mysteel.com; Edited by Russ McCulloch, russ.mcculloch@mysteel.com)

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