Chinese market after construction steel price increase

Chinese market after construction steel price increase

China’s construction steel market has been picking up steam in the first part of March following a price rise in Eastern China. Specifically, the market price in Eastern China surged dramatically by 300-400 Yuan/t in just one week. Southern China and other areas soon followed with gains of their own. At present, the general market price has approached 4000 Yuan/t. The above situation is mainly caused by the following factors: 1. The finalization of the global iron ore price for the 2005 fiscal year 2. Chinese inventories after the Spring Festival basically retained their normal levels 3. Domestic production and sales are linked smoothly 4. The gap between construction steel price and plate price continues to increase 5. China’s automatic iron ore import registration system, implemented on March 1, will likely result in largely increasing costs for small steel mills, which mainly produce construction steel. 6. Lower-reach industries with insufficient supply, such as the engineering steel industry, rush to purchase iron ore, leading to increased demand After the construction steel price increase, which is in line with many analysts’ forecasts and judgments, some negative factors will emerge. First, the aspect of market supply Production: China’s steel mills have carried out equipment overhauls from October 2004 through February 2005, resulting in reduced construction steel output, especially for long products. This will inevitably cause a deficiency in supply. Market inventory: At the beginning of March the domestic market inventory had fallen year-on-year; however, it has increased quite considerably compared with previous months. Comparatively high inventory levels have caused traders to face reduced capital input, meaning they will likely sell their goods at low prices. Second, the aspect of demand Temporary phenomenon: In 2005, there is still a large market for infrastructure construction in China, particularly because China will begin many projects related to the 2008 Olympic Games. Furthermore, it should be noted that current demand stems from temporary purchases of low-reach industries driven by price increase forecasts. Therefore, demand for construction steel in the first quarter will not show a sudden or huge increase. China’s macro-economic control: China has made preliminary achievements in macro-economic control. However, there is still much to do. Third, the aspect of capital At the recent National People's Congress (NPC) and National Committee of the Chinese People's Political Consultative Conference (CPPCC), China expressed that it would continue to control bank credit in an attempt to prevent fixed capital investment from rebounding. Thus, engineering steel traders will not be free to utilize capital. In fact, there are still projects on account and some loans that have been defaulted on. Fourth, the aspect of national policies China will cancel the billet export rebate and reduce the long products export rebate beginning April 1. Thus, billet export from China will decrease further. This will allow small and medium steel mills to obtain billets easily and put them into production. According to import and export statistics, China imported 1.92 million tons of steel products in January 2005, down 30 thousand tons month-on-month. In the same period, China exported 1.49 million tons, down 670 thousand tons. For billet, the imports in January were 100 thousand tons, up 10 thousand tons month-on-month, while exports were 560 thousand tons, down 990 thousand tons. Thus, China’s steel and billet imports totaled 2.02 million tons in January, down 20 thousand tons, and exports totaled 2.05 million tons, down 1.66 million tons month on month. All in all, traders in the steel industry should examine their operating modes after the sharp price increase for construction steel.