According to the figures of the
China Iron and Steel Association (CISA), the Chinese steel industry registered record profits of RMB 169.95 billion ($21.4 billion) in 2006, up 31 percent year on year. Most of the increase in profits was accounted for by the strong price hikes in the second and fourth quarters of 2006. Besides various other reasons, these strong figures may be attributed in the main to the transformation of the Chinese steel industry and to the
construction boom observed in many countries.
In 2005, the sharp increases in oil prices had to a certain extent curbed
investments in various parts of the world. However
China continued to increase its steel
production capacity, thus causing a steel glut in the world markets. Meanwhile, oil-rich countries availed of the oil price hikes as an opportunity to provide cash for
investments in the
construction industry. Besides, the slow trend of the US Dollar and Euro in 2006 caused investors worldwide to look for other tangible means of investing their money. In this respect, in addition to gold and other precious metals, which were the preferred investment targets, the
construction industry also attracted considerable capital. Beginning from the second quarter of 2006, when weather conditions improved and
construction got underway in
Russia, other
CIS countries and northern
China, steel prices also began to see considerable upward movement.
This year's winter has not been as harsh as last year's. This year there have not been any transportation problems due to frozen ports, nor have there been months-long cessations of activity at
construction sites, not even in
Russia. Therefore, the already-hot
construction industry continued more or less full-speed ahead even during the winter months, especially in
Russia and
China. The result has been an abnormal increase in the demand for rebars and
wire rods. Moreover, the US
construction industry has also started to recover. Therefore, the prices of the products in question have increased and profit margins have gone up.
The strength of the
construction industry around the globe has provided support for increased Chinese steel exports. The 10 percent tax imposed on
billet exports from
China, effective from the start of last November, caused increases in
rebar and
wire rod prices and also boosted demand for such products of Chinese origin in
Southeast Asia.
In addition to the
construction industry, the
automotive industry has also recorded notable improvements thanks to cheaper oil prices. Therefore, the demand for flat steel products likewise increased.
In the meantime, the Chinese steel industry is going through an important transformation phase. As one significant aspect of this transformation,
China has become the largest steel exporter in the world, while it was a net importer of steel only a year ago. The other aspect of the transformation is related to the variety of
production. In 2006,
China produced 418.78 million mt of crude steel, up 18.48 percent. However, the increase observed in finished steel
production was higher at 24.45 percent, rising to 466.85 million mt. And of the finished steel products, the largest increases were registered for hot rolled sheet - up 84.5 percent year on year to 5.57 milion mt, cold rolled sheet - up 53.1 percent to 13.14 million mt, hot rolled thin and wide strip – up 55.5 percent to 17.43 milion mt, and cold rolled thin and wide steel strip - up by 49 percent to 12.9 million mt. Meanwhile the
production of rebars increased only 16.6 percent, while
wire rod increased 18.3 percent to 83 million mt and 71 million mt respectively. The changes in the increase percentages indicate that the Chinese steel industry is switching towards the
production of finished flat steel products, which have higher profit margins compared to semi-finished products, and also compared to rebars and
wire rods.
Meanwhile, the global steel industry is still continuing to show strong movement. The
construction industry has not yet entered its peak season, but is already very active. The trade balances have changed so much that
Russia is no longer exporting
rebar and
wire rod products but has started importing rebars from
China,
Turkey and other countries instead in order to satisfy the needs of its domestic
construction industry.
The Chinese New Year holiday is coming to an end and Chinese exporters are expected to enter the market this week and next week with higher prices, especially for
rebar and
wire rods. The prices are expected to increase by $5/mt to $10/mt next week, compared to the latest pre-holiday levels. Products are still scarce and offers are given for late-April shipments at the earliest.
On the other hand, the flat steel market is softer and we need to wait until the end of February to get a better idea of the flat products trend.
Currently, the greatest matter of speculation for everybody involved in the Chinese steel market is the tax rebate policy issue. Sources say that the documents have been drafted for the reduction of the current 8 and 11 percent tax rebate rate for steel exports down to 0 and 5 percent respectively. However, the possible date of announcement of the policy is still a mystery. There are varying rumors about according to which the policy may be announced in March, April, May or June.