Declining supplies of strip are likely to continue to lower the price spread between hot-rolled steel strips and coils, we believe. The spread began to narrow in the middle of July as prices of strips and coils diverged.
The spread stood at 131 yuan/mt as of Tuesday July 24, down from a previous spread of 194 yuan/mt on June 28. As of July 24, the average price of hot-rolled coil lost 10 yuan/mt from mid-July while that of steel strip gained 27 yuan/mt.
Supplies of strip shrank considerably from production cuts in Tangshan as most strip producers in China are located in the city. Most coil producers are located in north China, not limited to the Tangshan area.
Prices of coil fell as inventories grew. Supply remained at high levels while demand shrank in the low season.
We also learned that demand from tube/pipe producers has remained robust from the start of this year, and this also buoyed prices of strips.
As production cuts extend in Tangshan, prices of strip are likely to continue to outperform coil prices and the spread between these two will continue to narrow.