Chinese steel prices nip at heels of upward global trend

Chinese steel prices nip at heels of upward global trend

Domestic Chinese steel prices, generally well below the global average, look to continue playing their steady game of catch up in 2005. In September 2004, China’s domestic steel price index was 119.97 versus a global index of 161.2, a difference of 41.23 points. By the end of 2004 the difference had narrowed to 26.89 points, with China reporting a domestic price index of 125.21 against the global index of 151.2. Six weeks into 2005 the gap grew smaller still: China reported a domestic steel price index of 131 versus 153 globally, a difference of 22. Through early February, the Chinese price index trailed the Asian index by only 13.3 points. Recent declines in long product inventories, falling from a seasonal norm of 400’000 tons to 100’000 tons in Beijing by the end of December 2004, mean that supply will be tight ahead of the annual Spring construction boom. On top of that, some sources suggest that several Chinese producers are shying away from long products and instead concentrating on the more lucrative flat market. If this proves true, then supply of construction steel could further tighten, thus pushing up domestic prices. Another factor playing a part in the convergence of steel prices is the soaring price of raw materials. China’s explosive growth means that the country is forced to look abroad to satisfy more than half its iron ore requirements. In fact, China was the world’s largest importer of iron ore in 2004, taking in 208 million tons. Thus, the 71.5% price hike agreed upon by China’s Baosteel and iron ore miners Hamersley (Australia) and CVRD (Brazil) will undoubtedly drive domestic prices upwards. Added to that equation is the possibility that Chinese producers will look to export an ever greater amount of products in an attempt to cash in on the fact that global prices are expected to rise as well. In 2004 China reduced its gap between steel imports and exports by nearly 50% from the year prior. China’s 2003 imports totaled 37.17 million metric tons versus 6.96 million metric tons of exports, a difference of 30.21 million metric tons. In contrast, imports fell in 2004 to 29.30 million metric tons while exports soared to 14.23 million metric tons, a difference of 15.07 million metric tons. While the narrowing trends in both the import and global price gaps are expected to continue, it will still be several years before China is likely to see itself playing the role of net steel exporter. On the other hand, there is talk that Beijing could cancel the export tax rebate on longs and billets. While such a move is aimed at curbing the steel industry’s consumption of raw materials and energy, it could stop the price convergence trend dead in its tracks. Prior to the announcement that the rebate might be canceled, many had predicted that China would export nearly 16 million tons of longs and billets in 2005. Such volume equates to an export tax rebate of RMB 6 billion ($725 million). If the rebate is in fact eliminated, the steel industry stands to lose a substantial portion of its profits. It stands to reason that elimination of the rebate would cause the domestic Chinese market to be flooded with longs and billets, while at the same time severely restricting global supply. Such a situation would cause a divergence in the Chinese and global prices as domestic prices in China become depressed and global prices rise in response to tighter supplies. So whether the disparate prices continue their convergence will depend in large part upon what, if any, macroeconomic measures Beijing decides to implement in regards to the steel industry.