Singapore, 7 February (Argus) — Soaring iron ore costs are squeezing Chinese steel gross profit margins to 21-month lows, with some steel mills' operating margins possibly turning negative if they cannot pass on the costs. Hot-rolled coil (HRC) gross profit margins were stable at around 100-200 yuan/t ($15-30/t) in January, with rebar higher at Yn400-500/t ($60-74/t), mills told Argus. But price increases for the two main cost inputs for China's blast furnaces, iron ore and coking coal, will slash these profits this month if mills cannot pass on the costs to buyers when they return after the 4-10 February lunar new year holiday. Seaborne iron ore prices rose by 17pc, or $12.75/dry metric tonne (dmt) to $88.35/dmt for 62pc Fe fines cfr Qingdao in the week to 1 February. Premium low-volatile hard coking coal prices over the same period rose by $7.60/t to $207.60/t cfr China. These higher costs have narrowed blast furnace margins. The Argus blast spread for HRC narrowed by $13.18/t to $246.10/t fob China basis in the week to 1 February, with higher iron ore and coking coal costs partially offset by a $5/t increase in the fob China HRC price to $516/t. The rebar blast spread narrowed by $19.18/t to $211.10/t, its lowest level since May 2017, as the fob rebar price went unchanged at $461/t last week. China's blast furnaces use an average 1.6t of iron ore and 0.54t of coking coal to make 1t of steel. This means iron ore price increases are magnified in the $/t cost of steel. Seaborne iron ore prices increases outpaced those in China's yuan-denominated cash markets. Mills saw portside iron ore prices rise by nearly $10/dmt equivalent in the week to 1 February, for an additional cost of $16/t for a tonne of steel. That is $1/t more than the low end of the range for January gross margins for HRC producers as surveyed by Argus. If operating and capital expenditure costs are included, some Chinese mills could already be operating at a loss at current price levels. Argus China blast spreads only account for feedstock costs, not any operating costs or taxes. The first step to estimating operating margins for China's steel exports is to remove taxes. China's steel export prices are inclusive of the 16pc value-added tax (VAT) minus any rebates. Rebar exports receive a 13pc VAT rebate, so fob China rebar prices include the net of 16pc minus 13pc, or 3pc VAT tax, after the rebate. HRC exports receive a 10pc VAT rebate, so fob China HRC prices include the net 6pc VAT. The mill's net HRC export price is $501.23/t fob China excluding the 6pc VAT, or $14.77/t less going to VAT, while rebar is a net $447.17/t, or $13.83/t to VAT. That cuts estimated blast furnace export margins to $231.33/t for HRC and $197.27/t for rebar. A typical north China production cost that includes emissions controls puts pig iron processing costs at Yn220/t ($32/t) and additional processing to make billet at Yn500/t ($74/t). These costs of $107/t alone, before further steps to make finished steel, cut China's export margins to $124.33/t for HRC and $90.27/t for rebar. Transport and port fees add further costs. But steel prices are frozen with markets inactive over the holiday. Not even Tangshan mills are updating offer levels this week. When mills and trading firms return from holiday next week, they are expected to increase prices, supported by the seasonal inventory build to supply peak spring construction demand. Policymakers are slowly boosting stimulus measures, which should boost steel demand in the second quarter to support steel prices.
China ’s steel industry is facing a 21-month low in profits , an possible losses , due to rising iron ore and coal costs . Seaborne iron ore prices have risen by 20 % or $ 1 per dry metric tonne ( dmt ) to $ 88.35 / ton , while premium low - volatility hard coking coal prices increased $ 7.60 / mt to hit $ 207.60 / mt . Meanwhile , steel prices in China have been frozen owing to the week - long Lunar New Year holiday , ending 10 February , but prices are expected to rise following the holiday to offset the higher costs and to support the peak spring construction demand .