SteelOrbis Shanghai hosts meeting on Chinas big moves
On July 20, the Chinese State Council formally released its Steel Industry Development Policy. On the night of July 21, the Peoples Bank of
China allowed the yuan (RMB) to appreciate two percent and announced that it would adopt a managed floating exchange rate regime.
These two news items had a great influence on the Chinese iron and steel industry. With a view to understand fully the new Steel Industry Development Policy and the appreciation of the yuan, the Shanghai representative office of SteelOrbis decided to hold a symposium on July 24. This symposium allowed relevant people to discuss sensitive topics at this important time and to exchange ideas and opinions regarding the impact of these two policies. Among the participants were company leaders, market researchers, and
distribution and sales managers. The following are the minutes from that meeting.
Opinions of Beijings new steel development policy
Regarding the Steel Industry Development Policy, there is no obvious difference. It was our common ground that this new policy would not have a substantial impact on the current steel market.
We think that the aim of this new policy is to control and adjust the newly increased
production capability, eliminate out-dated craftwork and equipment, save energy and resources, reduce pollution, adjust the strategic structure of the Chinese iron and steel enterprises, expand the scale of steel enterprises and enhance their competitive edge by improving steel plants
production capability through mergers and acquisitions.
Admitting that there is a necessity for the release of the new policy, participants voiced their opinions on the rationality of the target and feasibility of the process.
As to the improvement of the consolidation of industry, some said the Chinese market was as diverse as the demand. They therefore argued that consolidation would be inappropriate at this time since the consolidated companies would not be able to meet the diversified demand of the Chinese market.
Regarding trying to concentrate enterprises close to coastal areas, someone said that the Chinese market is prosperous and that demand grew rapidly in the northeast, central and western parts of
China thanks to government efforts to foster development in those regions. But, considering that the limit in domestic transportation capability and the cost of logistics, it may happen that supply will not be able to meet demand in those areas, thus causing a form of price isolation.
With regard to the formation of large-scale enterprises or groups through mergers and acquisitions, someone maintained that this will first stimulate the expansion of productivity of steel plants and that the steel plants would try to become the active party during the merger and acquisition period. Tang Steel regards the realization of productivity of 10 million tons as its last straw to survive. Some private steel plants with about 3 million tons productivity are also working toward the target of 5 million tons. Therefore, this will result in the rapid expansion of
production capability in the short term and impose great pressure on the market. The new policys goal of restricting productivity will stand a hard test.
Under the existing fiscal and revenue system, the merger and acquisition of domestic steel enterprises will cause damage to the interests of local governments and make them passive during the process. In a recent media visit, the chairman of
BaoSteel said it was possible that Mittal Steel Company could buy the shares of VALIN, while
BaoSteel had no such possibility.
From the stance of the new policy, there is a hint that the merger and acquisition of the enterprises will be realized by the administrative method, which could cause a loss in efficiency. The restructuring of
Angang and Benxi Steel was hard, and under the circumstances that the restructure was approved by the National Development and Reform Commission, Benxi Steel expressed its strong opposition.
Varied views regarding the appreciation of the yuan
Mr. Wang Tieshan, researcher with Huaye Iron & Steel Group, the largest private trader of steel material in
China, thought the appreciation of the yuan would result in a reduction of prices. He pointed out that if the productivity for domestic flat rolled products expands to 33 million tons and if the export tax would be further decreased, the appreciation of the yuan will have a negative impact on steel plants and the steel market. However, the steel plants have prepared for the price reduction in the next half year and are trying their best to get sales contracts; therefore, the price trend will be optimistic.
Mr. Xu Kai, researcher with Shun Ye Group, suggested that the appreciation of the yuan will make exporting more difficult. According to the current price, traders were not able to cope with the pressure caused by the appreciation. Upon the release of the revaluation news, some changes occurred in the market on Friday. The purchasing volume in
construction steel fell. Although there is a short supply for some specifications, it is mainly attributed to the fact that traders used their inventory to get loans from the bank, thus causing a reduction in inventory. As a matter of fact, the inventory of flat rolled products in Shanghai and its surrounding areas was on a formal level, and in there is adequate inventory at Changshu Port. Mr. Xu thought that a price reduction in the next half year was inevitable; however, the decrease will not be obvious and there will be frequent price changes.
Traders engaged in selling
construction steel materials such as long products have no strong response to the appreciation of the yuan.
Mr. Du Hongfeng, with Shanghai No.1 Steel
Trading & Logistics Company, the largest trader for
construction steel material in East
China, said that the appreciation of the yuan will have more of a psychological impact. Mr. Du, mainly responsible for contacting end users, maintained that the demand on the market did not change. Although some changes occurred on Friday, he thought these were temporary. He pointed out that e-business transactions saw a drop-off in prices on Friday. Some major contracts saw prices RMB 60/ton ($7) lower than the previous day. He suggested that many such deals were concluded at these low prices. Regardless, he said he expects HRB335
rebar in the Shanghai steel market to trade in the range of RMB 3100 3300/ton ($382-407/ton) for the latter half of the year. He pointed out that although the appreciation of the yuan will not have great impact on the current market, we still need to pay close attention to the fluctuation of the exchange rate.
Mr. Chen Jierong, with JiouLong
Trading Company, has years of experience working with steel plants and many traders. Generally speaking, he agreed with Mr. Dus ideas, adding that in a certain period the price for HRB335
rebar was RMB 2850/ton ($351/ton). Based on the current price for raw material, steel plants are teetering on the edge of loss, so traders should operate accordingly.
Mr. Liu Chaohui, responsible for the daily operations of Ganzheng Company, paid close attention to the monetary policies after the appreciation of the yuan. He thought the basic currency that the Central Bank invests will be lower after the appreciation of the yuan. If the Central Bank cannot supplement by other methods, a tense situation will occur regarding capital and the market price will tend towards decline.
Other participants then voiced their opinions, and a heated exchange concerning the market trend followed. Mr. XuFei of SteelOrbis then summarized the meeting.
Mr. XuFei said that the principle of the Steel Industry Development Policy was right and that this will be the guideline for the development of the Chinese iron and steel industry. In a complicated political economic environment, it is definitely not feasible to let the market dictate the course of the industry. The iron and steel industry cannot follow the losing way of the electrolysis aluminum industry, nor cannot it take the road of treatment after pollution that many developed countries took. Following such methods might see the iron and steel industry, and even
China itself, succumb to heavy pressure.
He hoped that all the people engaged in iron and steel industry could join hands to cope with the series of problems that will inevitably emerge in the process of carrying out the new policy for the steel industry. There is no doubt that it is not feasible to go back to take the road of audit and approval under the situation that
China is now reforming its administrative management system. He said that we cannot adopt the way that will do damage to the efficiency of competition under the circumstance that everybody is trying their best to sharpen the competitive edge.
He said that the appreciation of the yuan has resulted from the growth of the Chinese economy; therefore, the appreciation is a symbol of Chinas strength. It is a win-win result not only for
China, but also for the whole world. As far as
China is concerned, the appreciation is beneficial in that it will improve Chinas competitive edge. Plus, the two percent revaluation symbolizes that we are now taking a gradual process of reform.
He pointed out that before the appreciation of the yuan, the Central Bank bore the foreign exchange risk, meaning that enterprises did not need to take into account the uncertainty of the exchange rate. This alleviated the risk for enterprises and lowered their cost of doing business. But, after the reform of exchange rate regime, we will adopt a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies. This will increase the frequency and range of market price changes, which will expand the uncertainty of the foreign trade and raise the transaction costs. In order to find ways to mitigate risks, he suggested that relevant parties attach great importance to the next step the Central Bank will take regarding the exchange rate regime.
He also mentioned that after the appreciation of the yuan, the cost of imported raw materials will decrease and the appreciation will lead to price reductions for domestic raw materials, especially
iron ore. The cost of domestic iron and steel products will also decrease. The expansion of productivity and the reduction in exports will impose great pressure on the domestic steel market as well as on the price for steel products. He emphasized that we must treat the two percent appreciation in a systematic way instead of a simple way.