Chinese outlook is bearish, while US and EU markets face upside risks

Looking back to the last quarter of 2017, the average accuracy of MBR forecasts published in the Steel Market Tracker was 94% (when compared to forecasts published in the September issue). Our forecasts of European flat steel prices proved to be precise once again, with European domestic CRC and HRC prices scoring 99% and 98% accuracy respectively.

Although we considered Chinese domestic rebar prices in early December grossly overvalued, we did not expect such a sudden fall in prices - prices in Eastern China plunged from a nine-year high level on December 5 of 4,960 yuan ($749) per tonne to 3,735 yuan ($580) per tonne by January 16. Dwindling demand meant lower trading activity in December in January, with rising inventory levels at mills and in warehouses. Our long-term view remains for prices to go down, at a slower pace, and we do not foresee a price bounce-back even when demand improves in the spring.

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 as a whole remained at 79%-80% since the second week of December, while in Northern China, where most of cuts are happening, capacity stabilized just above 70% in December-January. Our long-term view remains for prices to go down, at a slower pace, and we do not foresee a price bounce-back even when demand improves in the spring.



In Europe, as market activity resumed after the holiday period, domestic mills started to push for an increase of ?,?20-40 per tonne for their coil prices. The main upside risk comes from the situation around Ilva, as it reportedly has problems with deliveries of material to its customers, with some buyers experiencing delays of up to two months. Without Ilva and the cheaper imports that Ilva traditionally aligned its offers to, European prices are bound to rise more strongly than usual in this seasonally strong time of year. This can have implications not only for Italian, but also a wider European market, as German and French suppliers, are likely to bolster their share in the Italian market, tightening markets across the region.

The US HRC index climbed to the highest level since February 2012 as US steelmakers were pushed through price hikes amid lower domestic production and import volumes, supported by bullish sentiment created by the Section 232 investigation moving into its final stage. US domestic price increases are also backed by relatively high import offers, not giving buyers enough incentive to turn to foreign material. However, if Section 232 measures are weaker than anticipated, the market can turn very quickly.

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