Monthly analysis on Chinese steel markets – February

Monday, 06 March 2006 14:46:54 (GMT+3)   |  
       

SteelOrbis Shanghai February was strong for flat products, while it was relatively weak for long products and raw materials. A. Raw materials Iron ore Iron ore market generally remained in a stalemate during the month as neither domestic steelmakers were willing to increase their purchasing prices, nor the miners were willing to sell their iron ore from low levels. All market players are waiting for the conclusion of international iron ore talks. Baosteel held a series of negotiations with major global iron ore companies however the parties failed to reach an agreement on the price increase. On the other hand, some local miners, who had capital problems, slightly reduced their prices while some others postponed their mining and concentrating activities. Nevertheless, the supply and demand of iron ore changed fundamentally: 1. The global iron ore supply is on the rise. Brazilian CVRD is expected to yield 220 million metric tons in 2006 and Australian Rio Tinto is expected to yield 170 million metric tons in 2007. China has also been developing its mines since 2003. The increases in production will bring equilibrium to supply and demand relation. 2. Ocean freight rates have fallen considerably since 2004. The BDI index, which was 6.208 point in December 2004 slumped to 2,407 points in December 2005. However the index has increased recently and is around 2,680 points nowadays. Many Asian steelmakers think the iron ore prices will definitely go up. Therefore, they have increased their iron ore shipments, leading to the increase in freight rates. 3. The appreciation of Yuan restricts the price increase. The US Federation is considering raising the basic interest rate nearly 5 percent to prevent inflation. Therefore Yuan faces more pressure. On the demand side, the growth rate of China's crude steel output will be under 15 percent this year. The global crude steel output will increase slightly and even drop in other countries except China and India. Therefore the growth rate of demand for iron ore will decrease. If the increase range of international iron ore contract prices remain under 10 percent, China's cost of imported iron ore will be equal to that of the previous year, or indicate a minor increase. Heavy melting scrap In February, scrap prices generally remained in a downward trend and the market prices at the end of the month were around RMB 1,700/mt ($211/mt) for the CIS scrap in Alashankou and RMB 1,940/mt ($241/mt) for the US scrap in Zhang Jiagang. Most of the EAF using mills are located in South and East China, which also affects the difference in prices, in addition to the freight difference. Current scrap prices are somewhat high compared to pig iron, therefore, many steelmakers have reduced their purchasing volume of scrap in February and preferred pig iron instead. Consequently, scrap imports have fallen considerably. Scrap prices are expected to remain weak nowadays. However, pig iron prices will increase, which may also lead to an increase in scrap prices because the inventories have reduced to very low levels. B. Long products Long steel prices were low before the Spring Festival and many traders had ordered products from mills in order to pile up inventories. As a result, total amount of long product inventory in Shanghai, Beijing and Guangzhou increased 65 percent to 1.25 million metric tons in February. Nevertheless, the prices have not improved in overall February. Although steelmakers increased their ex-factory prices, the demand in the market was low. Traders, who had bought products before the increases in ex-factory price increases may obtain some profit at the current price level. However, the construction sites are gradually starting their activities after the winter, therefore prices are expected to improve. Meanwhile many steelmakers and traders are now trying to export their long products and billets which would also play an important role in decreasing the domestic supply. C. Flat products Cold rolled and hot rolled sheets and coils Chinese hot and cold rolled prices have increased largely through February and they are still continuing to increase. The price hikes by steelmakers have played an important role in the market price increases. However, the transaction situation was not good in February as the end-users of flat products were unwilling to accept the large increases in such a short time. Steelmakers' price adjustment was mainly because of the recovery of exports. The decrease in the number of Ukrainian and Russian offers due to winter conditions gave Chinese steelmakers the opportunity to increase their exports. Anshan Steel exported 60,000 metric tons of hot rolled coils in February, Shagang and Baotou Steel exported around 50,000 to 60,0000 metric tons. Wuhan Steel and Benxi Steel also exported large quantities of products. In February, offers from domestic steelmakers and traders rose to $400-420/mt FOB from $370/mt FOB during the Spring Festival. Many steelmakers cut their supply to domestic market in order to fulfill their export task. Cold rolled products also saw a drop in supply. Main cold rolled sheet producers such as Wuhan Steel, Anshan Steel and Benxi Steel cut their supply to the domestic market sharply, aiming to fulfill their export task. March is generally the business season for finished steel, therefore the market is expected to recover. However, the resumption of Russian and Ukrainian flat product sales will affect China's exports. Plates Transactions for plates recovered slightly in February. Medium plate prices have increased obviously. However, the increase was artificial. Many steelmakers increased their ex-factory prices, therefore traders did not want to sell their products cheaper and increased their market prices. China's already high plate production capacity is expected to increase further in 2006. Therefore, although the prices increase, the plate market is expected to remain under pressure.

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