Chinese steel market heading up but late May decline predicted

Thursday, 17 May 2007 15:56:06 (GMT+3)   |  
       

SteelOrbis Shanghai

The Chinese steel market has seen a movement of significant price increase since the middle of April. From that time up to May 11, the increase range of common carbon billet in Tangshan reached RMB 350/mt ($44), while that of Q235B 20 mm medium plate totaled RMB 150/mt ($20). The only exception is flat rolled, which has experienced small price fluctuations.

The major causes for the price increase from mid-to-late April  were the active trading performance and reduced inventory levels. However, coming up to the end of the month, the mills issued ex-factory prices, with some of them even announcing several hikes in quick succession, thus boosting up market prices. Therefore, we may say that climbing ex-factory prices have been the major factor for the market price increases seen from the end of April up to mid-May.

There are several reasons that contribute to the recent soaring in Chinese steel market.

Firstly, April and May are traditionally the hot season for the release of demand for Chinese steel products. China's Q1 GDP registered a gain of 11.1 percent, with the CPI at 2.7 percent - proof of the continuing high growth and low inflation in the macroeconomy. Consequently, the Chinese central government has not felt the need to implement any tightening measures on the overall economy, which is thus expected to maintain rapid growth, and so constitute a good foundation for future steel demand.

Secondly, several factors have pushed up production costs. As of March 1, 2007, India began to impose a tariff of about $7 on iron ore exports, thus strongly pushing up Chinese iron ore prices. Compared to the early March levels, domestic ore prices have seen an increase of 8.3 percent, with a 9.2 percent rise recorded for imported ore. Meanwhile, coke and scrap prices also picked up by different margins, providing momentum for the steel price increases.

However, the most important reason for the price rise trend in the market has been the announcements of new policies by the Chinese authorities.

Due to the announcement of the export rebate adjustment and the new export license system, mills and exporters have been pushing through exports as quickly as possible in order to cut export costs and avoid potential risks, resulting in the sharp drop in domestic supply. According to the April exports figures, finished steel exports at 7.16 million mt broke the historical record, and was far higher than the previous levels.

China's State Council also held a meeting on April 27, stressing their target of eliminating 22.55 million mt of out-of-date iron making capacity and 24.23 million mt of out-of-date steel making capacity before this year is out. If local governments fail to meet this requirement, the people responsible will be punished.

Due to these strict measures, the out-of-date capacity has already been cut to a certain extent, leading to reduced supply and raised costs.

Under the combined impact of the above factors, the Chinese steel market will maintain its upward trend before May 20 when the new export license system takes effect.

However, it should be remarked that the Chinese steel market is not far from its upper limit.

Firstly, the present price is at a relatively high level, creating good profit for both mills and traders. For the next week, the market may continue to climb up, accumulating more and more risk of a  market slump.

Secondly, during the period from late May to early June, the southern regions will enter the rainy season, which will slow down the demand of the construction industry, thus increasing market pressure.

Thirdly, of the huge amount of steel exports in April and May, a relatively big part of them resulted from the early execution of future export contracts. If no new export contracts are concluded in the future, the mills will instead supply the domestic market. Moreover, since mills and exporters set their export price in accordance with the domestic market price level, the present export quotation from China is very high. In this case, many overseas customers think the price is too high for them to afford. There have been only a few export contracts concluded in recent days.

Fourthly, several new flat rolled production lines will gradually come on stream, providing rapid supply growth. In fact, Tangshan Steel, Shagang, and some other mills have already made downward adjustments to their flats prices for May. Anshan Steel raised their cold rolled coils and galvanized coils to a very high level previously, so they reduced their ex-factory price for June this week.

Fifth, due to the sluggish demand, the recent international market has tended to go steadily down on the whole.

Anyway, because of the unbalanced supply and demand in the short term, rising space still exists for the future market. But after May 20, mills will focus on the domestic market, leading to price decrease. China's steel market is expected to present an overall downward trend during late May.