How will the spring madness in the steel industry end?

The slight uptrend which started to be observed in finished steel prices in February this year gained momentum in March, while price increase margins started to surprise buyers and sellers in April also. In early March, the Chinese government announced some measures to reduce steel supply and increase demand. It stated that it will cut steel production by 100-150 million mt over the next five years, while announcing production cuts for the duration of the Tangshan International Horticultural Exposition 2016 (April 29-October 16) to reduce air pollution. All these announcements provided a boost for steel prices. While prices soared, market players expressed varying opinions. However, there are two views in particular which are the mostly widely heard among market players. One is that prices have bottomed out and are strong enough now to resist significant declines, while the other is that prices will plummet again in the event of China resuming its activities in the export markets with an aggressive pricing policy.


These two opposing standpoints can each be supported by compelling arguments. First of all, looking at the positive scenario, the price levels seen in recent years in the iron and steel industry are far from healthy. This fact is underlined by the number of companies which are facing financial problems. The fierce competition resulting from China’s low prices has caused serious damage not only in Turkey but also across the worldwide industry. The financial losses incurred by the Chinese iron and steel industry itself have increased immensely and caused state subsidies to be terminated at least on the export side. In addition, almost every country has launched antidumping duty investigations against Chinese steel products and new investigations are on the way. Considering all these developments, international steel prices may be expected to remain firm at current levels instead of indicating a sharp decline. Market players who believe in this positive scenario expect prices to maintain their current levels with just some slight fluctuations.


Turning to the negative scenario, reasons may also be given to back up this standpoint. The increases in steel prices have contributed to the profitability of the Chinese iron and steel industry, especially as it uses iron ore in its steel production. Moreover, Chinese buyers have been building up their stocks over two months due to the scheduled production cuts totaling 5.56 million mt during the period of the horticultural expo in Tangshan. This has resulted in the reopening of backward production capacities which had been idle for some time. Having withdrawn from the global market and thereby allowing a reduction in global oversupply, China is now causing a glut of supply in its own domestic market. China produced 822 million mt of steel products last year and the large volume of stocks they have built up due to the expected 5.56 million mt shortfall in production in Tangshan makes people wonder whether the Chinese buyers have made correct calculations in term of stock buildup. There are also newly-commissioned projects in China and this raises another question: how healthy is it to ramp up production so quickly? Against this backdrop, there are increased concerns about the accumulation of excessive stocks in China, with many market players fearing that China will return to the export markets with aggressive pricing policies supported by the relief gained in terms of profitability following recent price increases. Although the Chinese government will abolish the state subsidy for exports, this is China we are talking about! It was China that sold boron-added products when hot rolled coil exports were challenged by antidumping duty and this is the same China that started selling chrome-added coils when boron-added coil also became subject to antidumping duty and which exported square bars since steel billets have restirictions to export. As a result, we cannot be sure how effective the elimination of the state subsidy will be in stopping Chinese exporters. Considering all these factors, the negative scenario is that prices will plummet to the levels at which they had previously bottomed out or, worse, to even lower levels.


We have tried to examine both views for you in detail. While both views are well-founded, one thing is certain: the spring madness of high price levels started with China and it is China that will shape the future price trend.

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