SteelOrbis Shanghai
On April 10, China at long last issued its new tax rebate policy for steel products, thus bringing to a close the endless circulation of rumors in both the domestic and international steel markets during the past six months. For most industry insiders, it was with a sense of great relief that they heard the official announcement of the new policy - they were finally able to give their full attention to the consideration of the probable developments which would result from the policy change .
Over the Spring Festival period, influenced by the rapid increase in export orders, most mills were confident concerning the future, and thus hiked their ex-factory prices continuously. Considering the long-term sluggish market atmosphere during the post-festival period last year, longs traders this year tended to be relatively cautious while flats traders seemed much more optimistic.
Against the expectations of most people, the Chinese steel market in March saw a slight waving movement in longs and a sharp fluctuation in flats. Due to the high inventory levels, the overall market saw a weak trend. Coming up to April, due to the expanding demand and rising trading activity, the prices of some varieties of steel products began to rebound.
As regards the situation in April, since mills and traders have already inked contracts with overseas buyers, exports will remain at a high level. As a result, domestic market supply is not likely to see any remarkable increase. With the steady release in demand, the Chinese steel market will not be greatly affected on the whole, especially as regards the rebar market, which is at the bottom right now. At present, the long products market is moving on a stable trend, while the flats market shows a slight weak tendency, particularly in CR products and galvanized coils. However, since these two markets previously dropped by a significant margin, they will expect to see a quick rebound - even if any further decrease occurs.
It still remains to be seen what happens in the export situation in May and afterwards. When Chinese mills and traders gave out their export quotations for May, they had already factored in the possible cancellation of the tax rebate into the quotation levels. Currently, the export quotation of long products from the large-scale mills is around $480-500 FOB, while that of hot rolled coils is $570-580 FOB. Whether the international market will accept these levels will be seen in the period ahead.
Looking back to the price ascending trend in the international steel market since November 2006, the booming demand for long products in Europe, Russia, the Middle East and Africa constituted the major momentum which pushed up global steel prices.
Due to the strong growth in the world economy, especially in China, the consumption of energy and raw materials soared rapidly, driving up the prices of these resources. As the major producing regions, Russia, the Middle East, and Africa saw fast rises in their revenues. Since these are also developing countries, their urgent development and construction needs as regards infrastructure, real estate, energy, and raw material projects directly stimulated the demand for long products.
An immediate and direct consequence of the booming demand and mass production of long products is the increased prices of raw materials such as scrap. This is turn had the effect of pushing up the production costs of flat rolled products. In the current global market situation, the long products market is stronger than its flats counterpart, because long products climb up on their own initiative, while flats just follow the rising trend.
Nevertheless, Russia, the Middle East and Africa do not have such a strong demand for flats as they have for longs. Troubled by its surplus domestic production, China needs to balance its inadequate domestic demand by means of exports. Currently, it seems that the European market is the major, and even the only, focus of upward momentum in the international flat rolled market.
Noticeably, the US market is no longer the driving force for the global steel market, as is evident from the continuous decline in its imports. Nucor Company even unusually issued HRC export quotations to the European market. Moreover, the Q1 average production capacity utilization rate of the US mills was 83.4 percent, while for the same period last year it stood at 89.1 percent. Against a background of sliding imports and lower capacity utilization rate, US domestic inventory is still at a relatively high level because of the sluggish market demand. Therefore, current under heavy market pressure, the US is unable to boost up the international market.
The long products market provides the foundation for the current price increases in the global steel market. Meanwhile, the European market is the only source of momentum for the flat rolled market. Thus, we may expect the price ascension of long products in Europe, Russia, the Middle East and Africa to determine the future rise of the world steel market, while flats in Europe will decide the future of the global flats prices to a certain extent.
To sum up, in the wake of the tax rebate cancellation, the Chinese market will see a step up with fluctuations in the short run, and is unlikely to see any sharp drop. In the medium or long term, the future trends in Europe, Russia, the Middle East and Africa will be decisive for the Chinese market. Based on the present situation, the possibility of further increase still exists in the above-mentioned regions. Consequently, China's steel market is expected to maintain its good performance during the first half of this year.