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A price rally in the Chinese market stalled in December, with different trends developing in flat and long products prices. Weekly capacity utilization rates in China have stabilized, indicating that mills have not needed to further cut their output to fulfil government targets. Utilization rates in China have, as a whole, remained at 80% since the second week of December. In Northern China, where most of the cuts are happening, capacity stabilized just above 70% in December, after steadily falling week-on-week since late August. Chinese domestic and export HRC prices were largely stable, showing only a slight downward trend, during the second half of December and early-January despite slackening market fundamentals. However, HRC inventory held at mills has risen by 24% in the space of four weeks by January 12, signaling that re-sellers and users are cutting their purchases.

Declines were more prominent in the long product sector, as rebar prices in Eastern China plunged from a nine-year high on December 5 of 4,960 yuan ($749) per tonne to 3,740 yuan ($579) per tonne by January 15. Dwindling demand meant lower trading activity in December, with swelling inventory levels at mills and in warehouses, putting pressure on prices and indicating that an earlier upswing was to a large extent sentiment-driven.

MBR’s outlook for Chinese steel prices in 2018 is bearish, as government investment into large infrastructure projects should wane, limiting construction steel demand. Steel prices are already under pressure, but as production starts reviving to the usual rate after government-imposed cuts are removed in March, we anticipate a strong downward price correction, without any significant upside for the rest of 2018.

In Europe, as market activity started to resume after the holiday period, domestic mills are reportedly going to attempt an increase of €20-40 per tonne for their coil prices. The previous price hike, announced in December, helped to hold prices steady during the holiday period, and now mills are likely to make a new push for a price rise. A gap with import prices is minimal, and in the case of Southern Europe offers come above the domestic price level, giving domestic mills a good chance to succeed.

In December we also learned about new developments in the ongoing European supply-side consolidation process. Marcegaglia left the consortium with ArcelorMittal to buy Ilva as the European Commission (EC) reportedly raised anti-trust concerns, in particular for the market concentration in the galvanized steel sector. According to MBR estimates, ArcelorMittal’s share in the European domestic coated market was 42% last year, and the addition of Marcegaglia and Ilva’s production capacities would have seen it going above 50%. But a removal of Marcegaglia might not be sufficient to get a clearance from the EC, and ArcelorMittal has reached a preliminary agreement to sell its Italian Piombino plant to Arvedi, conditional on ArcelorMittal completing the acquisition of Ilva. Piombino plant has production capacity of 800,000 tonnes per year of galvanized and pre-painted steel, while Arvedi has about 1 million tpy of installed HDG capacity.

On January 11, a few days before the official deadline, the US Commerce Department submitted results of its Section 232 probe without revealing any details about its recommendations. President Trump now has 90 days to react to the report, and we will be able to see the summary of the findings only after the administration decides on the course of action, with US suppliers calling for “broad, meaningful and impactful” remedies. If the investigation results in tariffs and/or quotas, US steelmakers are looking into increasing their market share versus imports this year, and increasing their pricing power
in 2018.

In this regular section, MBR’s base metals team summarise their in-depth reports to highlight key factors driving the markets and short-term price forecasts. MBR’s Base Metals Weekly Tracker service provides independent, detailed and timely analysis on the latest data,price movements and developments that impact the market conditions and outlook for LME-traded base metals.

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