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Kallanish Kallanish

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April, 5th 2020

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FEB 05

Credit tightening hits Chinese steel, iron ore


China’s decision to increase some People’s Bank of China interest rates on the first day back from the New Year holiday sent futures prices into freefall. It also took its toll on iron ore price expectations, although spot steel traders are not overreacting and still expect better prices in the weeks ahead.

The Kallanish index for 62% Fe Australian fines slumped $4.4/tonne back to $80.21/dry metric ton cfr Qingdao. There was still little activity on the spot market but the dramatic slump in steel and iron ore futures on Friday brought down price expectations. On the Dalian Commodity Exchange, May iron ore was down CNY 20.5/t to CNY 626/t ($91.12/t), while coking coal was down CNY 39/t to CNY 1,190.5/t. In Singapore meanwhile, March 62% Fe futures settled down $5/t at $77.97/t.

On the Shanghai Futures Exchange meanwhile, the May rebar contract closed down CNY 226/t at CNY 3,113/t ($453/t), falling below spot prices for the first time in months.

In Shanghai, rebar traders were almost entirely absent but 20mm HRB400 rebar prices were essentially flat at around CNY 3,160-3,210/tonne, with one or two nominal offers being made. There were more hot rolled coil traders in the market but signing very little volume. 5.5x1,500mm Q235B HRC was up around CNY 10/t from before the holidays at CNY 3,820-3,860/t.

China’s benchmark one-year lending rate remains steady at 4.35%, as it has done since October 2015. It lifted its seven-day repurchase rate by ten basis points to 2.35% however, increasing the cost of short term liquidity between banks. A change in credit policy had been expected (see Kallanish China Steel Intelligence – December) and the change was a small one. It is the first interest rate increase in six years however and the timing was uncertain.

Credit-reliant sectors, including commodity speculators, were therefore unsurprisingly the first to be spooked. For real steel demand, the change in policy will have a serious impact over time, but in the short term it may even support demand as construction projects raise and spend cash as quickly as possible before benchmark rates are also increased.