SteelOrbis Shanghai
Against the backdrop of the sharp price declines in the domestic steel market, on October 17 in Beijing the China Iron & Steel Association (CISA) held a meeting with about seventy steelmakers including Shanghai Baosteel Company (Baosteel), Anshan steel Company (Ansteel), Wuhan Iron & Steel Corporation (WISCO), Heibei Steel company and Jiangsu Shagang Group. The market players came together for the purpose of gaining a deeper understanding of the current issues facing the steel markets, of finding a way to respond to the current complicated and challenging situation, and to calm down the sense of panic spreading through the market - all with the aim of getting through the current situation together.
As the participants agreed, steelmakers in China are in general facing the following issues:
1. In September and October, steelmakers have been making less profits and more losses. Some mills have been making an average loss per metric ton of steel of about RMB 1,000 ($147).
2. Steelmakers are facing big pressures from high inventory levels of both raw materials and finished products.
3. Less export orders are being concluded. In the case of some companies, orders received for November and December are down by a half, compared with the usual levels.
4. The production of downstream industries is registering a slower growth rate or even a decrease.
5. The sector in general lacks centralization, with price policies varying depending on the different mills.
Speaking in relation to the current situation, CISA Executive Vice Chairman Luo Bingsheng said that the most important thing was to stabilize the market. Mr. Luo touched on three points: though the financial crisis is unavoidable, the basic situation for China's economy has not been changed; though the demand in the downstream industries is weakening, it will not shrink greatly; persistent price declines cannot inspire demand. In his opinion, market players should have confidence in the development of the Chinese economy and not be too pessimistic. He stressed that steelmakers should adjust their production structure, cut production moderately, carry out production according to their sales situation, standardize their steel sales system and stabilize their ex-works prices.
Wu Xichun, consultant for the China Iron and Steel Association (CISA), pointed out that the prices of most steel products had dropped back to the level of RMB 2,000-3,000/mt ($293-440/mt), with a decrease rate of 30 to 40 percent. The decline in prices is due to the following factors - First, with supply picking up and demand declining considerably, there has an inversion in the supply and demand relationship. Second, there is a feeling of panic across the market and, influenced by "buy when prices are rising not when they are falling" attitude, the demand shrinkage has been magnified. During the period from January to August 2008, China's crude steel consumption increased by 34.437 million mt or 12.2 percent year on year, and the growth rate is 2.5 percentage points higher than the same period last year. Meanwhile, the actual growth rate of investment in fixed assets in urban areas is below 20 percent, the growth rate of foreign trade exports dropped by 5.3 percentage points year on year, while that of industrial added value went down by 2.7 percentage points year on year, with major industrial products including automobiles, refrigerators and air-conditioning all posting negative increases. Mr. Wu said that the prices of steel products have been fluctuating significantly since the beginning of this year. Apart from the influence of the reversal of the supply-demand relationship, the sharp rise in China's iron ore import prices has also had a direct influence. Furthermore, the sharp decline following the sharp rise in prices earlier this year is also due to the slowdown of the global economy caused by the US financial crisis. The financial crisis in developed countries will very probably evolve into an economic depression, which will exert a strong influence upon China's economy.
Mr. Wu also put great emphasis on the following points:
1. Confidence should be boosted in the whole industry to ensure the stable and rapid development of China's economy.
2. Combine quantity control with structure adjustment and seize opportunity to eliminate laggard capacity, he advised. Boost the reconstruction of enterprises through competition, and improve their creativity and competitiveness.
3. Take the opportunity to establish win-win strategic cooperation partnerships with upstream and downstream enterprises (including the logistics industry).
4. Advocate rational competition and stick to three principles - Firstly no production should be carried out for products whose prices are lower than cost level. Secondly, no production should be carried out without contracts in order to keep inventories at reasonable levels. Thirdly, no delivery would be made without payment, so as to avoid incurring new debts.
5. Keep suggesting to the government that it should control exports of low value-added products such as finished steel, semi-finished and pig iron, improve regulations on steel export duties, as well close any loopholes. Furthermore, exports of low value-added steel products should be discouraged, while domestic iron ore production should be enlarged in order to bring down the import iron ore price to a reasonable level. Only in this way will mutual benefits be seen for both the demand and supply sides, Mr. Wu concluded.