The booming steel market situation experienced by China's numerous steel traders may come to an end in 2008. Although steel product prices are expected to see continued support and even to maintain a steady rise this year, an atmosphere of worry is spreading among traders. The number of steel traders in China is still rising, but it increasingly looks like it is probably time for China's scattered steel traders to combine together into larger entities. In fact, some smaller-scale steel traders have already taken steps to merge with each other in order to be ready to face the serious competition that lies ahead in the future.
In February 2008, China's CPI and PPI increased by 8.7 and 6.6 percent respectively, compared to the same period in 2007. The situation as regards inflation in China has forced the country's central bank to raise bank interest rates. On both January 25 and March 25, China's central bank announced upward adjustments of half a percentage point to the deposit reserve ratio. As a result, the ratio currently stands at an historical peak of 15.5 percent. In this context, the surplus currency in circulation is flowing back to the central bank from the market.
Most steel traders in China are experiencing a shortage of cash supply. Once the cash supply chain breaks or faces serious threat, the traders will immediately be dragged into a precarious situation.
According to the rough figures, the total number of steel traders in China is over 200,000. Most of these are small-scale entities. The booming steel market of recent years enticed many newcomers to enter the industry, whether engaging in the local steel trade or in steel exports.
Due to the current Chinese steel market situation, steel traders face huge pressures both from steelmakers and from their own buyers. On the one side, they have to pay money to steelmakers when placing orders in advance. Usually, they pay one or two months before delivery by the steelmakers. Subsequently, after the traders deliver the goods to their customers, they are obliged to wait for one to three months to collect full payment from these customers. Generally speaking, the average turnover period of their funds is around three to four months. This means that they have to prepare three to four times the funds necessary for most other businesses in order to keep operations going. This is the key factor why local steel traders in China are consistently under pressures deriving from cash fund issues.
Most steel traders have no great power to negotiate either with the steelmakers or their own customers because they have no unique capability in the market and also because competition among traders is fierce. They need to satisfy their customers and also maintain a good relationship with the steelmakers in order to guarantee future supplies of steel. For this purpose, they need sufficient currency supplies so as to keep their daily operations running.
Any break or threat of a break in the currency supply chain will push steel traders to seek greater security, to increase their available funds and expand their distribution channels, thereby maintaining and boosting their position in the face of market competition. Against this background, a growing merger trend is likely to be seen among steel traders in China in the future.