As the steel prices continue to rise, steel output in
China restarts to increase rapidly too. More and more steel products are produced, mainly sold in domestic market.
In 2005, steel prices slid down and central government's macro policies limited and cooled down the whole over hot investment. For this reason Chinese steel makers suffered the changing process of monthly steel output growth margin from increase to decrease. In February 2005, the growth margin of
China's monthly output was 14.7% - compared with the same time one year before. After reaching the peak with 35.5% in May, the growth margin started to go down until reaching bottom 17.4% at the end of December. With the start of the year 2006, steel prices continued to rise and steel output tended to increase. In February,
China's monthly steel output reached 31.82 million tons indicating an increase of 21.7% (yearly growth rate).
The reason for the steel output to restart increasing is the rising trend of prices. Figures from the related state prices monitoring department show that steel prices have been rising since early 2006. The latest average price of main steel products in
China is about RMB 4025 per ton, indicating a weekly increase by RMB 40 per ton and weekly growth rate of 1%. The same average price has increased by 5.51% since the end of 2005.
Due to the following reasons, steel prices will probably tend to keep increasing for a certain period of time.
-
Baosteel and other several steel giants have pronounced recently that they would adjust their factory prices to a higher level in May and June. This news strongly supported the prices.
- Second, steel export situation is still good for the time being.
- Third, as to the result of the ongoing
iron ore negotiations between the world's top three
iron ore suppliers and
Baosteel –
China, as steel makers' representative, although there is no result so far, the market prefers to believe that the ore price will rise.
- The last, steel traders are willing to take measures to keep the prices on a rising trend . In 2005, steelmakers and traders suffered big losses after prices' collapsed, especially later in the year. Today, they are longing for gaining profits to compensate for the loss.
Due to the sliding down of steel prices, major Chinese steel makers limited their
production towards the end of 2005 under the guidance
China Iron & Steel Association. But these restricted and newly built
production capacities were released rapidly after entering 2006 because steel prices began to rise again. Where will this released energy lead the market prices to? Currently, the steel transaction situation is just normal and steel quantity dealt with is also at the usual levels, while the prices keep strengthening slowly. So, where should we be looking at, for the additional capacity added to steelmakers this year? Inventories! The newly added
production volumes are most probably stocked in big and small warehouses all over the country which could easily mean the added steel capacity has not reached the end users, i.e. the real buyers in the market yet and we must note that the inventory level is becoming higher and higher!
Certainly this situation involves risks, as it is impossible that the market will endure the release of huge capacity for a long time. Building up and melting down of inventory decisions should be handled with caution, and under current circumstances our suggestion would be to go for gradual decrease of such inventories.