Rapid Decline in Distribution Inventories to Support ‘Cost Push’
The author is an analyst of NH Investment & Securities. He can be reached at will.byun@nhqv.com. -- Ed.
Baosteel has raised its January domestic distribution prices for HR, CR, and plate products by RMB400/ton, RMB500/ton, and RMB300/ton, respectively. Driving the increase in distribution prices are iron ore price hikes and strong demand. Despite recently high iron ore prices, cost push momentum is expected to sustain on strengthened demand from downstream industries and dwindling distribution inventories.
Amid surging iron ore prices, Baosteel sharply hikes Jan 2021 plate product prices
China’s Baosteel (600019.SH) has decided to raise is January domestic distribution prices for HR, CR, and plate products by RMB400/ton, RMB500/ton, and RMB300/ton, respectively, in an effort to transfer cost increase from the recently surging price of iron ore to product prices. Strong demand also contributed to the price hike decision. From 2H20, healthy demand for automobiles and home appliances has resulted in steady demand for CR products. Against this backdrop, the company has been raising its CR distribution prices from July. In January, the CR distribution price is to be bumped up by a hefty RMB500/ton.
Although it predicts a rise in raw material costs in 1Q21 due to the recent surge in iron ore prices, Baosteel believes it can escape profitability decline via the transfer of cost expansion to product prices. Following its announcement of January distribution prices, on Dec 10, Baosteel’s shares closed 4.1% higher versus the day before.
Rapid decline in distribution inventories to support ‘cost push’
As of Dec 10, China’s steel distribution inventory came to 8.84mn tons (+18.9% y-y), marking the ninth consecutive week of decline. While inventories of HR and rebar items are up 20.5% and 36.8% y-y, respectively, CR inventory is now down 2.4% y-y.
China’s domestic distribution prices for HR and CR products are continuing to climb on a daily basis. On Dec 10, the HR price reached RMB4,483/ton, the highest level in three years. Meanwhile, the price of CR topped RMB5,390/ton, the strongest since Oct 2011. Also reflecting healthy downstream industry demand, the CR-HR price spread recently widened to RMB907/ton.
The price of Australian iron ore (Fe 61%) imported to China is also following a day-by-day uptrend, hitting US$156.9/ton on Dec 10. While iron ore prices are high, demand from downstream industries is picking up and distribution inventories are declining rapidly. Accordingly, ‘cost push’ is anticipated to drive up steel prices going forward.