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Zhang Guowei: “Fluctuations in steel prices may be seen in 2011”

Tuesday, 25 January 2011 17:33:55 (GMT+2)   |  

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Mr. Zhang Guowei has worked for many steel mills and trading companies. He worked for Jilin Tonghua Iron & Steel Group from 2002 to 2005. Subsequently, he served at Shanghai Baoli Group and at Custeel.com in Shanghai. Mr. Zhang has a deep understanding of the steel market because of his experiences both in production and other operations at steel mills and his management experiences in steel trading, including electronic ‘screen' trading. In 2008, he founded his own company called Shanghai Xihong Iron & Steel Co., Ltd.
 
With 2010 now over, could you comment on the Chinese steel market in 2010, and on how high capacity, high inventory and low profitability have become normal in the domestic steel market?
 
China's steel market improved steadily in 2010. In an environment of high capacity, high inventory and strong demand and also given the impacts of relevant government policy, China's steel market fluctuated upwards during the year in question. Because of the government's policy changes, prices of steel products fluctuated frequently. During the year,many large differences in prices were observed. In this context, profitability in the steel industry declined.

Additionally, China failed in its attempt to negotiate an annual iron ore contract price agreement for 2011, and thus it will purchase iron ore according to the quarterly pricing system, based on the spot index, and such a pricing system will be more unfavorable to the Chinese steel industry. In 2011, China's finished steel and iron ore markets will continue to be characterized by fluctuations, with slow, gradual increases and sharp decreases.
 
Currently, there are many factors affecting the Chinese market, especially stocks, futures and electronic ‘screen' trading data. How do you view these issues?
 
It is certain that the current steel market trend follows the trends of stocks, especially bulk stock. Steel prices are basically led by the trends of stocks and bulk stock in the short term; however, in the long term the situation in the steel market is determined by the market's own basic factors, i.e., supply and demand.

Besides the abovementioned issues, we should also focus on the situation in the international market, for instance, on the three major US stock indexes and the economic situation in Europe, so that we can better understand the international market. At present, the international economy still has a great influence on the Chinese market, China's steel imports and exports directly affect the spot trading of steel. We should strengthen our understanding of domestic and international market conditions in order to make correct judgments regarding the steel market trend.

Your company has continuously focused on the flats market. Could you comment briefly on the difference between the flat and long steel markets?

The difference is obvious; the users are different. From a market perspective, the current supply and demand patterns for longs and flats are subtly changing. With the accelerated elimination of backward production capacity, the supply of long steel has been gradually reduced, while there has been a rapid increase in the flat steel supply. Longs prices have been performing much better than flats prices in recent months, which is the best proof of the changed supply situation. 
 
How do you view the outlook for the market in 2011? How do you see steel prices trending in Q1 2011?
 
As regards the market in 2011, we are starting the year with some apprehensions. Based on past years, the market will see an upward trend in Q1, and it might reach historically high price levels due to the continuous upward movement in the price of bulk stock in the international market. Meanwhile, Chinese national policy to control inflation will further influence the market, and there will be a shortage of funds. Thus, the market may observe a significant fall in 2011, but I am not sure of the specific timing of this fall. 

Regarding the Chinese steel industry which is now feeling the effects of inflation, prices in the steel market will remain at high levels. On the one hand, although policies of raising interest rates and the deposit reserve requirement ratio have been introduced, it is impossible to change the situation of excess liquidity. On the other hand, China's steel industry is now in an important stage in its efforts to save energy, eliminate backward production capacity and control new additions to production capacity. As a result, China's steel output will not grow significantly. Meanwhile, affected by production costs, steel prices in 2011 will be relatively high; however, fluctuations in prices may be seen and so traders should be more cautious.


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