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Party over: As margins tummies, coal products in China for hard times

MANILA / BEIJING (Reuters) – Chinese steel producers went for the first time in three years a month when prices…

MANILA / BEIJING (Reuters) – Chinese steel producers went for the first time in three years a month when prices hit a bear market on weak demand and close record supply, ending with good profit margins.

PHILOTOOTH: A man works in front of an oven at a steel mill from Dalian Special Steel Co., Ltd. in Dalian, Liaoning Province, China, June 20, 201

8. REUTERS / Stringer / File Photo

And with the world’s No. 2 economic cold and facing increased risks from a growing trade war with the United States, China’s steel producers are likely to feel more pain unless Beijing launches new incentives, say traders and analysts.

With tumbling prices, Chinese plants – making half of the world’s steel – reduce costs by returning to cheaper iron ore commodities, to a congratulations for miners like Australia’s Fortescue Metals Group ( FMG. AX ).

China’s steel production hit a record of 82.55 million tonnes in October, but steel prices and margins have since shrunk when China called back on winter exit aid aimed at reducing smog, while demand deteriorated as cold weather slows construction.

“Fat margins were caused by strong demand and high availability, which is unsustainable in the long run,” says analyst Richard Lu. “This decline is not temporary but the beginning of a downward trend.”

China’s steelmakers had been in party mode since 2016 when prices doubled because strong infrastructure pushed increased demand and supply tightened as the country’s hard pollution campaign disturbed production.

Beijing also removed 140 million tonnes of steel capacity in 2017, which corresponds to approximately 17 percent of the year’s total production.

Profit margins increased to record 1,706 yuan ($ 246) tonnes for rebar and 1,326 yuan for hot-rolled coil in December 2017 and have stayed high this year and pressed mills to increase production.

But demand began to slow down this month, milling mill was milled in conjunction with more smooth production curves this winter as China enabled regions to set their own production constraints based on emission levels.

The price of China’s piggy bank – used in construction – has fallen 21 percent to a figure of 3,496 yuan per tonne on Monday from a peak of seven years that reached in August and put it on a technical bear market.

PHILOTOOTH: A machine is working to mix iron ore in Dalian Port, Liaoning Province, China, September 21, 2018. Image taken September 21, 2018. REUTERS / Muyu Xu / Filfoto

Profit margins fell. Rebuilding producers in the top-end manufacturing city of Tangshan saw margins narrow to 297 yuan per tonne on Monday from 889 yuan at the end of October, according to data tracked by Jinrui Futures.

Manufacturers of hot-rolled coil (HRC) – used in manufacturing – suffered a loss this month for the first time since November 2015, Jinrui Futures said and estimated it at 130 yuan ($ 18.75) per tonne on November 21. [19659004] Tivlon Technologies, a Singapore based data storage company for steel and iron ore, expects Chinese HRC producers to realize a loss of 150 yuan per tonne in the second half compared with a loss of 200 yuan in the first half. Most rebar producers are on the breakeven, according to Tivlon.

HIGH-GRADE ORE PREMIUM DROPS

Predict further price drop in steel, traders who usually fill in winter before pickup in demand from spring extinguish recovery and pull stocks to the lowest this year.

“The risk of hiring physical steel products right now is too high,” said a rebar dealer from China’s northern Liaoning province who gave his last name as Wang. “The market generally believes that prices will not stop falling unless the steel industry voluntarily reduces production.”

As a result of weaker steel prices, the average utilization rate at Chinese factories fell to 67.54 percent last week after rising for three straight weeks, data that Mysteel compiled consultancy services showed.

Mills that previously favored high-quality iron ore to achieve maximum power with lowest emissions also increase costs by using more material of lower quality with iron content below 60 percent.

The shift benefits miners like Fortescue, which has been selected against high quality producers like Brazil’s Vale ( VALE3.SA ).

“We have seen increased demand recently with factories that acquire more 58 percent material due to reduced steel margins,” said Fortescue Chief Executive Elizabeth Gaines to Reuters via email.

The price of iron ore at 65 percent for delivery to China SH-CCN-IRNOR65 fell to a 7-1 / 2 month low of $ 81 per tonne on Monday, while 58 percent ore similarly slipped to $ 36.50 weakest since June SH-CCN-IRNOR58, according to SteelHome consulting. 19659004] It lowered the premium for high quality to $ 44.50, the smallest since March. In July, the prize hit record of $ 54.70, as China’s clearer sky bid increased the preference for higher grade ore.

“If the margins continue to release, more mills will use low grade iron ore, “said a head of a mill in southern China, producing both rebar and HRC.

($ 1 = 6.9397 Chinese yuan)

Reporting by Manolo Serapio Jr. in Manila and Muyu Xu in Beijing; Editing Richard Pullin

Our Standards: Thomson Reuters Trust Principles.

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