CISA suggests market stabilization measures

CISA suggests market stabilization measures

At a symposium held today in Beijing, the China Iron and Steel Association (CISA) indicated that the great fluctuations in market prices are due not only to the demand problem, but also to the exaggeration of market information and the large numbers of traders. CISA indicated that the export rebate, which helps Chinese steelmakers compete in international markets, would not be adjusted. Every year, China imports large amount of steel products, thus, many imported products could be replaced by domestically-made products. CISA called on steelmakers to cut their medium plate and hot rolled output by 5 percent in the fourth quarter, to leave a reasonable profit margin, and to standardize sales policies and imports and exports. While prices seem to be on the rebound in Europe, America, Japan, and South Korea, China’s steel market is still stuck in a downward trend. So it was no surprise that among the main questions at the CISA symposium were: What are the new problems in the current domestic steel market? How can they be solved? How can flat rolled producers survive in the market? Mr. Luo Bingsheng, vice standing chairman of CISA, and Mr. Qi Xiangdong, CISA’s vice secretary general, tried to answer some of these questions. The following are abstracts from their speeches: I. A series of new problems beset the domestic steel market in 2005 a) Rapid growth rate in output. Crude steel output in the first nine months was 254.88 million tons, most of which was produced by large and medium sized enterprises. Output of medium and small-scale steel mills only increased 18.7 percent. b) Changes in 2005 import and export. During the first nine months of the year, export volume was 17.3 million tons, and that of import was 20 million tons. The narrowing of the import/export gap has helped to alleviate some of the market pressures in China. c) Lack of coordination in steel market. It is estimated that there are at least 200’000 steel-related enterprises in China. Therefore, it is not easy to coordinate with these enterprises. d) Fluctuations in market prices. This is due to not only the demand problem, but also the exaggeration of market information. II. The current international steel market Starting from September, prices in the international steel market began to increase, especially in North America. By the end of the first week of October, the CRU price index in the international market rose to 140.3 points, up 16.2 points compared to that of August. The medium plate price index was 139.3 points, up 18.9 points, and long products were up 10.1 points to 142.4 points. The international economy grew 4.3 percent in 2005, and is expected to maintain such growth in 2006. The market conditions of America and Japan are good, while China saw an unreasonable price decline. In addition, Asia, South America and the CIS saw price increases. III. Macro-economic development in China a) The current economic environment is not in line with what experts had anticipated. b) Since 2001, GDP and fixed assets investment have shown show steady growth. 2005 GDP is up 9.4 percent and fixed assets investment has grown 22.9 percent this year. Total fixed asset investment through the first nine months is RMB 8.61 trillion ($1.06 billion), RMB 1.6 trillion ($197 million) higher than a year earlier. The apparent consumption of steel products is likely to increase 21.5 percent according the above-mentioned growth rate. In the first nine months of 2005, the apparent consumption in real terms increased 19.7 percent. The current market shares of HR and CR sheet/coil as well as color coated products is not high. c) Premier Wen indicated that expanding domestic demand would be a major focus of the eleventh Five-Year Plan. Investment and consumption should be taken into consideration in order to maintain stable growth in the world’s largest market. d) The export rebate will not be adjusted. Reasons for this include the import/export strategy and the lack of support for the export rebate reduction proposal. Japan, South Korea and Russia have a large proportion of exports, while China’s export volume in the first nine months only accounted for 8 percent output. IV. Does China oversupply steel products? The following factors should be taken into consideration when judging the domestic supply of steel products: 1. If the inventory increases sharply due to weak demand 2. Reduction in output 3. Great losses incurred by steelmakers 4. Tight capital 5. Some enterprises go into bankruptcy For the actual situation, consider the following: 1. The normal inventory level in Beijing is 750’000 tons, yet the current inventory is 260’000 tons. Monthly demand is around 600’000 tons. 2. The production and sales in China are balanced. Enterprises neither cut their production nor go into bankruptcy. Based on the above two examples, it is inappropriate to say that the market is oversupplied. V. CISA’s suggestions a) Stick to a reasonable price level and keep a reasonable profit margin. Flat rolled prices should be lower than that of imported products. Profit margins should be provided for long products. Price of flat rolled products should be set on a quarterly basis. b) Contract management should be standardized. Recently, traders have been concluding their transactions before prices had been set, which harmed the market. Furhtermore, large steelmakers had arrangements where they would compensate traders for losses suffered because of price drops. This practice should also be discouraged. c) The business method of selling to end users should be enhanced. d) Import and export should be given close attention. Enterprises should refrain from importing products blindly. e) Instead of simply offering extremely low prices, China should take into consideration the export situation in other countries. f) Work teams for medium plate and hot rolled sheet should be established, with the aim to coordinate the market. CISA suggests that steelmakers cut their output by five percent in the fourth quarter in order to stabilize the market and enhance the confidence in the markets. SteelOrbis Shanghai