Metals & Mining

Thu, 03/26/2009 - 11:16

In this week's Interfax metals guest column, Hu Yanping, an industry analyst with Beijing-based Umetal, looks at the options open to Chinese steel mills to support steel product prices. Translated from the original Chinese by Li Chunlan.

Hu Yanping, Beijing-based Umetal industry analyst

Shanghai. March 26. INTERFAX-CHINA - Domestic steel product prices have been falling since early February and remain at a very low level at present, with prices of rebar and hot-rolled coil falling by between RMB 500 ($73.18) and RMB 700 ($102.45) per ton. At the same time, domestic steel demand from various industries, especially the real estate industry, is sliding, while steel demand from the international market also remains sluggish. Therefore, limiting domestic steel product supply by scaling back production is one of the best options available to support steel product prices.

The drops in steel product prices since early February are mainly due to the rapid increases in domestic steel product output since December 2008, which led to China's average daily crude steel production reaching 1.444 million tons per day in February, equivalent to total annual output of 520 million tons. This has resulted in the current market surplus.

Domestic market stockpiles of rebar and hot-rolled coil stand at 4.3 million tons and 2.85 million tons respectively at present, compared to the lowest level of 1.54 million tons and 1.47 million tons recorded in December last year.

Currently, spot prices of rebar and hot-rolled coil in Shanghai stand at around RMB 3,140 ($459.55) and RMB 3,320 ($485.89) per ton respectively.

Falling Chinese steel product exports are further driving home the necessity to cut production, as demand from China's main steel product importers, including South Korea, the European Union and the United States, continues to shrink, while domestic prices remain higher than those overseas. This may result in China becoming a net steel product importer in the near future.

According to recent research, the top 28 domestic steel mills, including Baoshan Iron and Steel Group (Baosteel Group) and Anben Iron and Steel Group, saw April's combined steel product export orders fall to 129,600 tons, compared to 299,000 tons in March.

Furthermore, I think domestic steel demand will slide in 2009, as the country's gross domestic product (GDP) growth will slow from last year's level, and it will take at least two to three years for China's economic growth to recover.

China's investment in the real estate industry grew by only 1 percent year-on-year in the first two months of 2009, compared to 32.9 percent in the same period last year. The real estate industry is the biggest consumer of China's steel products, and will be the main driving force behind declining domestic steel demand in 2009, regardless of the government-aided surge in infrastructure construction, which will consume only a small proportion of China's steel products. 

There is also a heavy surplus of steel production capacity in China. According to the China Iron and Steel Association (CISA), China's total steel production capacity reached 660 million tons by the end of 2008. With new production facilities due to come online shortly, production cutbacks will be key to maintaining healthy development of China's steel industry in 2009.

Production cutbacks will cause steel mills to incur losses in revenue and market share, but if there is not an obvious decrease in domestic steel product supply, prices will keep falling - the ramifications of which will be more devastating in the long run.

The above is a personal opinion piece by the author. Its publication in no way implies that Interfax shares the views expressed in the article.