SteelOrbis Shanghai
After the May Day holiday, hot rolled prices began to see a minor reduction in the Tianjin market while the other steel products still continued their sharp increase trend. On May 16 and May 18, hot rolled coils in Shanghai and Lecong experienced successive drops. Thus, the hot rolled market movement served as the prelude to the overall downward movement which followed across the Chinese finished steel market.
By the end of trading on May 25, the decrease in rebar totaled RMB 160/mt ($21/mt), while that seen in wire rod reached RMB 180/mt ($24/mt). Meanwhile, the decrease in hot rolled coils totaled RMB 250/mt ($33/mt), while cold rolled dropped RMB 50/mt ($7/mt).
Since mid-April, the Chinese steel market had been rising rapidly, with rebar increasing on average by RMB 350/mt ($46/mt) and wire rod going up RMB 570/mt ($75/mt). Medium plate, profiles and flat rolled products all moved up strongly. After the sharp market increase, most traders were eager to cash in their products and so the upward movement in market prices came to a halt.
Furthermore, the macro-control measures issued by the Chinese government seriously affected the market atmosphere. On May 18, the China's central bank promulgated three policies: the raising of the interest rate and of the deposit reserve rate, and also the expansion of the floating range for the RMB against the US dollar. In addition, on May 21 the Ministry of Finance announced the imposition of tariffs on steel exports, thus firmly demonstrating China's determination to cut back on its steel exports.
In line with the jump in domestic prices, export quotations had also soared all the way up since mid-April. Billet quotations exceeded $500/mt FOB, while those of long products stood around $515-525/mt FOB, with HR coils reaching $560-580/mt FOB. After this sharp jump, the export price became too high for overseas customers to accept, and so concluded export orders for June and July are quite limited. In order to ensure sales, mills pushed their domestic traders to increase their orders and some mills in practice even lowered their ex-factory prices. On the other hand, traders worried about the possibility of excess supply in the future and were eager to sell their products, thus causing a decline in market prices.
The above factors are the direct and major reasons for the recent price decrease. However, these factors have in the main a psychological impact on the market atmosphere, as opposed to an impact that could actually change the levels of market inventory and of supply.
The present period is the hot season for steel consumption in China, with the result that demand remains at a high level. Moreover, the new export license system, effective as of May 20 has encouraged mills to attempt to shift as many exports as possible, resulting in reduced amounts of supply for the domestic market. Consequently, current market inventory is not very high despite the rapid growth in steel outputs.
Nevertheless, China is also to implement 5-15 percent tariffs on steel exports as of June 1. Due to the new license system, mills and traders have already stopped receiving many orders for June and even into July. Therefore, with the reduction in future exports, domestic supply will gradually rise, contributing to increased market pressure.
Meanwhile, with the strengthened macro-economic controls, future demand is expected to come down a little compared with the first half of 2007. In addition, the exports carried out during April and May are expected to influence the nearby foreign markets. For instance, the Vietnam market is now obviously characterized by booming imports and soaring inventory.
Furthermore, as the international market was following its recent downward trend, the Chinese government announced the imposition of export tariffs on certain steel products - a move which may not have the substantial impact that the rather sensational reactions to it in the major world markets might lead one to believe. If the export price is not as high as the domestic price, then the mills will simply reduce their exports and turn to the domestic market, thus further aggravating the market situation at home.
However, due to reasons of cost, the market is likely to go down only by small but continuous steps in the period ahead. The tight availability of raw materials in the global market and the climbing freight charges have pushed up the prices of imported iron ore, scrap and coal, which have been followed by the domestic iron ore and coke prices. Therefore, the raw materials required for the mills' production has remained at a continuous high level. Moreover, the Chinese government has raised the criteria on environmental protection and is implementing differential electricity prices in order to promote energy saving and pollution reduction. These environmental policies have also boosted up the mills' production costs to a certain extent.
Once steel prices fall below the cost price level, mills - especially the medium and small ones - will reduce or even stop production, leading to a decrease in supply. At the same time, the mills will push down the price of raw materials, which will provide them with space to lower their prices further.
In conclusion, due to the reduced overseas demand and limited domestic demand, the overall supply and demand situation can be expected to deteriorate accompanied by the continuing rapid growth in steel outputs. China's steel market is expected to show a slow, downward price tendency over the next three months.