SteelOrbis Shanghai
Chinese steel market began to decline from the late June, with the
rebar market going down first, which was followed by
wire rod, HR coil, other finished steel products,
semis,
scrap,
iron ore, etc. By the end of June, Chinese steel saw overall downward trend.
After experiencing the price decrease for nearly two months, the biggest decrease margin for
rebar reached RMB 450/mt ($56), and that for hot rolled coil even reached RMB 1,100/mt ($138), leading to great loss on steel mills and traders.
However, while entering into mid-August, Chinese steel market began to move stable. Since the end of July, long products prices firstly rebounded, followed by medium
plate and hot rolled coil, with other finished steel also going into a gradually stable trend. Currently, the finished steel market becomes calm with slight fluctuations, no big range for both increase and decrease in short term. Meanwhile, the same is true for semi finished steel market.
In particular, under the pressure of falling finished steel prices in earlier times, the raw materials prices such as
scrap and
iron ore also saw some reduction, but it is over the past week that rebound occurred in raw materials prices. Thus, all the markets become stable.
How should someone evaluate the situation? Is it a temporary stop before decrease or a ground prepared for increase? A thousand readers, a thousand Hamlets... For example, the views on the market trend of hot rolled coil differ greatly. The pessimistic people think that hot rolled thick coil will fall to the level below RMB 3,000/mt ($375), while the optimistic people think that the highest price for the next half year will reach RMB 4,000/mt ($500).
We may get a clearer understanding on the market after reviewing the causes of price decline, analyzing the current supply and demand situation, and making a forecast on the international and domestic macro-economy after September.
The causes that resulted in the price decline in Chinese steel market can be summed up into the following three points.
1. The market itself is in need of adjustment. After the continuous sharp increase in steel prices, the increase margin for hot rolled thick coil exceeded RMB 1,600/mt ($200), curbing the demand in the downstream side. With the growing market risks, the decline momentum became stronger and stronger, thus the decrease was inevitable once a suitable occasion came into being.
2. The demand reduced. Traditionally, July and August are in the off-season for steel
consumption, which is true for both international and domestic market, with reduced domestic demand in the downstream side and decreased orders from South East Asia and
Europe.
3. Macro-control influenced the capital and confidence. In the first six months, Chinese GDP growth reached 10.9 percent, and the year-on-year increase in fixed assets investment got to 29.8 percent, up 4.4 percentage points in growth rate compared with the same period last year. Worrying about the overheated economy, the central government took a series of macro-control measures, seriously affecting the market confidence. In late-June, the Central Bank held a window guidance meeting, requiring commercial banks to tighten money supply, which caused capital shortage. In Tianjin market, the price of hot rolled thick coil dropped from RMB 4,500/mt ($563) to RMB 3,900/mt ($488), and this market decline evoked overall decrease in all the regional markets, which is closely related with the tight capital.
To understand the route of the waving market, we must first have a basic idea about the steel market for the second half year.
Firstly, brisk demand will remain in both international and domestic markets.
International economy is in a rising trend, in spite of the decline in American economy, which should be regarded as an adjustment after a rapid growth instead of the beginning of market reverse. With the weather in South East Asia becoming better and the end of summer vocation in
Europe, international market demand will recover, therefore, Chinese exports can still maintain at a relatively high level.
On the domestic side, we must have a correct understanding about the macro-control. Chinese government has defined the macro-economy for the first half year as “stable and high-speed growth”. Macro-control is in purpose of preventing overheated economy rather than slowing down the current economic growth rate. The government took measures step by step instead of curbing economic growth at one blow through some stringent means. We can not expect that the economic growth for the next half year exceeds that for the first half year; neither should we be too pessimistic about the following six months.
Secondly, domestic money supply will still be quite loose.
To some extent, capital is the catalyst for asset value. The external structure of Chinese economy and great international competitiveness of its products contribute to the bulk international trade volume. And it is impossible to eliminate the trade surplus in short term. On the one hand, international investors are favoring the opportunities in
China; on the other, they are betting on the appreciation of RMB. These factors cause that foreign capital flows into
China through various means, forcing the Central Bank to continuously put a lot of base currency into the market. Although the Central Bank has tried its best to hedge against the exchange rate, it is still difficult to change the market situation of over liquidity.
In addition, the Central Bank and
China Banking Regulatory Commission can rein the loan of commercial banks, but the civilian capital can still greatly boost economic growth due to its huge quantity and difficulty of supervision.
Thirdly, net imports see sharp reduction.
The most important advantage of Chinese steel industry is that all of the newly-invested equipments in Chinese steel mills are advanced ones in the world or even among the first rank. With the familiarity and master of these
production equipments, the quality of Chinese steel products is improved rapidly, reaching the level of the imported products.
From January to July, Chinese steel imports decreased by a big margin compared with the same period last year, to about 1.5 million metric tons.
From January to July, the cumulative net exports of Chinese semi finished steel and finished steel totaled 13.42 million metric tons, equivalent to 14.04 million metric tons crude steel, compared with the net exports of 2.2 million metric tons crude steel for the same period last year.
Since the domestic market prices are much lower than that of international market in July and August, the imports will decline in the future. The new supply resulted from imports can not bring much pressure to the market, due to the small quantity.
Through the above analysis, we should be both optimistic and cautious about the market for the next half year.
After experiencing the sharp decrease for nearly two months, steel prices are at a relatively low level with little inventory in all the markets, thus, the market players have no momentum to sell low. Contrarily, some products such as long products are preparing for rise. So are the other products.
Furthermore, in spite of the tight capital currently, it is not common for traders to sell their
production at low prices for loan return. The market atmosphere is no long nervous.
Last but not least, exports orders are in gradual rise. In earlier times, the continuous decrease in steel products prices made the foreign traders to hold a “wait-and-see” attitude. With Chinese steel market moving stable at a quite low price level, orders from abroad increased day by day. Countries in South East Asia such as Vietnam can afford to purchase Chinese hot rolled coil at $450 CFR. Some traders make a good profit by exporting hot rolled thick coil purchased at about RMB 3,500/mt ($438) in
China. Additionally, export quotations of
semis,
wire rod and
rebar also go steadily up.
Generally speaking, the rapid growth in steel
production still creates much pressure on the future market. Although the daily
production of crude steel for July declined compared with June, the year-on-year increase reached 22.2 percent, which is the highest since the beginning of this year. Meanwhile, the upcoming export tax rebate will not have much influence on the current export quotation, but it will restrict the future export prices to go further higher.
Some market players are quite pessimistic about the future market simply by comparing the market in this year with the previous year. Their conclusion may be not correct, because they ignored the strike on the market caused by centralized release in
production and sharp increase in imports over the second half of the previous year.
Overall, it is better to regard the current steel market trend as a ground prepared for rise. The market will be in gradual climbing for the next six months. The highest price of HRB 335 16-25 mm is expected to reach (in Shanghai) RMB 3,000/mt ($375) and that of 5.75 mm
HRC to reach RMB 3,800/mt ($475).