Inspired by the Chinese government's RMB 4 trillion investment plan and the huge increase in loans issued by the banks, in the fourth quarter of 2008 and at the start of 2009 all market players in China had begun to entertain excessively high hopes for the future of the domestic steel market; contrary to the trends worldwide, mills operated at full capacity, traders kept inventories at high levels, while importers ordered a great deal of foreign steel products.
According to the preliminary data, China produced 41.52 million mt of crude steel in January 2009, up 2.4 percent year on year and 9.9 percent month on month, constituting nearly half of the global crude steel output during the month in question. Based on China's average daily crude steel production in January of 1.34 million mt, the country's annual production would be expected to be 489 million mt. Meanwhile, according to the daily output of crude steel of 1.41 million mt in the middle of February, China's annual output would be expected to amount to 515 million mt, even higher than the total output for 2008. At the same time, steel outputs in other countries and regions across the globe were registering declines of 40-60 percent year on year.
The high steel outputs seen in China at the start of 2009 raised serious concerns. At one meeting of the China Iron & Steel Association (CISA), honorary CISA chairman Wu Xichun expressed his fears that steel prices in China would enter another period of decline as demand remained at very low levels.
Against the backdrop of the global economic crisis, the strong contrast between production volume and demand level is at the root of the inevitable slump in steel prices in China, which has seriously hit domestic mills and traders. When traders returned to the market after the Spring Festival, they found great quantities of products piled up in the various markets and ports, with inventories reaching historical high levels while demand failed to pick up. Attempting to attract orders, mills and traders have had to lower their prices, leading to the sharp decline of market prices. With many mills and stockists operating in the red, some of them have been forced to exit the market. All this can be attributed to the blind optimism of the Chinese steel market in the fourth quarter of 2008.