Monetary matters

SteelOrbis Shanghai explains China’s current monetary policy and the effect on steel prices with Shen Xinfeng, General Manager of Shanghai Huifu Trading Co.,Ltd.

 Given the continuously tight monetary policy, do you think there will be any major upcoming changes in the steel market? If so, what do you think will change the most: demand and supply dynamics or market mood? If not, what do you think is the main factor behind stabilization?

 SX: If the government continues to implement a tight monetary policy, it would present great opportunities for large enterprises, while it could be detrimental to small ones. Large enterprises can make more deals through private interest subsidiaries; for example, Rizhao Steel Group’s interest subsidiary-free policy is quite suitable for enterprises with abundant capital. However, on the part of small enterprises with insufficient funds, transactions that need their own funding would bring about financing problems and increased pressure, thus creating an immeasurable impact on the whole steel industry. Our interest rate increases are in a common range, and they are not high compared with required reserve rate—the same situation apparent in the 1950s. Therefore, in my opinion, anti-inflation policy will last for quite a long time.

 Will 1,000 flats of government-subsidized houses stimulate the demand and price of construction materials before November? If so, what will be the increase rate of prices?

 SX: If the 1,000 flats of government-subsidized housing project is approved to state-owned enterprises (Baosteel, WISCO, etc.), in my opinion, it will have no impact on the market, but currency appreciation will increase base prices and exert influence on all prices.

 During June and July downstream demand was sluggish, but crude output was continuously increasing. Which do you think is better to stabilize the market and face overproduction problems: decreasing price or output?

 SX: It is not proper to say the season was defined by strong demand or weak demand. In the July-August period, demand was strong, but it also became a bit sluggish. Steelmakers did not know whether to decrease the price or not. However, price declines have been able to make products more competitive to the end user in the short-term. As far as I am informed, the exports in Tangshan were at a good level, especially structural steel and construction materials in the Korean market, and the demand for crude steel was strong. Many producers directly export crude steel but not totally conclude transactions in domestic China.

With the high output record in February 2011, domestic iron ore is becoming more competitive. How will import prices and the quantity of China’s iron ore change? Also, with the expansion of new projects in 2011-2012—including Karaka’s 10 million mt expansion project, Sino Iron’s 28 million mt expansion project and BHP Billiton’s 50 million mt expansion project—in the coming two to three years, will the iron ore situation of supply exceeding demand be more serious?

 SX: Different geographical environments lead to different iron ore quality. China’s iron mines are rich but not easy to explore, so import levels will not be influenced too much in the short term. However, prices depend on different quality and demand. With regard to the future international situation, I cannot judge it. But large companies should think about the long term themselves—history tells us whether certain projects were blind expansions and hoards or purposeful operations. If there is no particular situation that happens in the international market, the iron ore situation of supply exceeding demand will be possible.

 Considering the recent performance of the Chinese steel market as well as all kinds of potential decisive factors, how do you predict the future market?

SX: At present, the actual transaction prices for main steel products are tending to increase, but under the influence of the price relation of each kind of steel product, the uptrend seems not so active, and it also illustrates that the market has not yet entered into a firm rising trend. Due to the continuous upticks of construction steel prices in the Chinese domestic market, the advantage of higher production cost has already occurred. Prices have reached the level of previously record highs, so any further movement upward will probably be impeded. Therefore, the prices in the steel market will gradually stabilize. As for the markets of other products, they fluctuate between neutral and up, affected by the driving force of the construction market and the support of raw material costs. Once they lose the two advantages, the markets will be out of control. Considering that downstream demand is low, and export orders have decreased recently, a downturn will become apparent if the markets have only a few advantages and the prices are stable. However, spot prices of other kinds of steel (except for building materials) are still far away from the previous price pressure line. Thus, it is anticipated that the whole steel market won’t show a large movement, continuing to fluctuate slightly on the basis of such price levels. As a whole, under such a market situation, steel mills’ release of production capacity, adjustment of price policy and fluctuating steel futures prices will influence the operation of the market.

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