Review of China’s long products market situation

Review of China’s long products market situation

After a strong start to the year, China’s domestic steel prices began losing ground in second quarter. On June 24, 2005, China’s domestic composite steel price index was 123.85 points, down 10.46 percent (14.48 points) against the index of 138.33 points at the end of March, 2005. Looking at long products in particular, the index’s 96.34 points at the end of June shows a decline of 12.62 percent (13.92 points) since the end of March. Beijing’s macro control policies can be blamed for much of the large price fluctuation of long products. China’s long products market presents the following characteristics: First, closely related with fixed asset investment, rebar and wire rod prices have found themselves mired in a downward spiral. This has led to an anxious market where players are inclined to adopt a wait-and-see attitude. Based on the Metallurgical Price Inspection Center, the average market price at the end of April for 6.5mm common wire rod was RMB 3’617/ton ($437/ton), a decline of 6.1 percent ($28/ton) from the end of March. The situation was similar for 12mm rebar, which saw its price fall 6.06 percent to RMB 3’736/ton ($451/ton). Second, there are noticeable variations in price among China’s many provinces. Long products prices took a greater hit in Eastern and Northern China than elsewhere. Towards the end of June the price difference between Eastern and Northern China and the rest of the country had widened to nearly RMB 400/ton ($48/ton). The average price of 20mm rebar in Eastern China was RMB 2’956/ton ($357/ton) versus RMB 3’388 ($409/ton) in Southwestern China. Third, long products prices in Eastern China and Northern China in June fell below the industry’s average manufacturing cost. On June 27, 2005, the market price of 6.5mm common wire rod in Shanghai was RMB 3’140/ton ($379/ton) and in Beijing was RMB 3’100/ton ($375/ton). At the same time, the average manufacturing cost including taxes was RMB 3’400/ton ($411/ton), meaning those enterprises that relied upon longs as their main product mix likely suffered losses. The following are several factors that affected China’s domestic long products price drop: 1. New supply and demand situation for long products. Slowing demand growth coupled with a rich stream of output has led to the current period of oversupply. Beginning in March 2005, China’s central government implemented a series of macro control measures to curb excessive real estate investment, surging housing prices and the irrational structure of some industries. A noticeable drop in long products demand occurred shortly after Beijing introduced these measures. During the first five months of 2005, China’s rebar output totaled 26.09 million tons, up 16.29 percent year on year, while its wire rod output totaled 23.37 million tons, up 22.71 percent year on year. On the other hand, China’s apparent consumption of rebar during the same period grew only 14.13 percent, while the apparent consumption of wire rod showed a 17.57 percent growth. The growth in apparent consumption of both products failed to keep pace with the capacity expansions, thus contributing to the oversupply situation that currently exists in the market 2. Steel manufacturing costs have been dropping, thus making it harder for steelmakers to use high costs as an excuse for maintaining high prices. The first quarter of 2005 saw many domestic steel enterprises grapple with a 71.5 percent surge in iron ore prices; a short coke supply that led to rising coke prices; and a pig iron and scrap market that operated at high levels. However, entering the second quarter, the market prices of many leading raw materials have all posted significant declines. By late June, the price of 66% concentrate iron ore in certain regions dropped nearly RMB 270/ton ($33/ton) to hit RMB 680/ton ($82/ton). Scrap prices slid to RMB 2’115/ton ($256/ton) from RMB 2’700/ton ($326/ton), while common carbon billet prices have declined to RMB 2’800/ton ($338/ton) from RMB 3’600/ton ($435/ton). Taking the drop in manufacturing costs into account, the decrease in steel prices seems reasonable. 3. China’s steel enterprises adjusted their long products ex-factory price downwards. The market confidence of steel distributors and end users has been almost nonexistent for the past two months. Distributors have dared not book orders from steelmakers, and end users have shortened their procurement circle in an effort to adopt temporary purchases for temporary use. As a result, distributors have seen their inventories decline while steelmakers continue to see their stockpiles grow. To counteract growing inventory pressures, China’s steel enterprises have consequently adjusted their ex-factory prices downwards to promote sales.