March 18, 2010 -
PRLog -- Market sentiment picked up on the back of end-users restocking for Q110.The Chinese steel market endured a roller-coaster ride in Q2 and Q3, with price volatility in an uncertain environment. Renewed optimism in Q409 was a welcome surprise as all of the leading steelmakers had reduced list prices in November, only to announce increases in December based on expectations that demand will remain firm. Buying has also been influenced by the rising trend in raw material prices, especially iron ore, which rose above the US$100/tonne mark in November. Crude steel output grew 10.5% to 472.5mn tonnes for the 10M09 period according to the China Iron and Steel Association (CISA). CISA forecasts that production capacity will increase by 58mn tonnes to 718mn tonnes in 2009. However, the association warned that oversupply conditions remained a threat and could affect both future steel prices and profitability. With a fragile recovery taking place in the global economy, Chinese steelmakers have not been able to export their way out of trouble. Although finished steel exports rose in October for the fifth month in a row to 2.71mn tonnes, they are still 41% down on the corresponding period in 2008. Imports in October declined by 22.5% to 1.48mn tonnes compared with the previous month. For 10M09, China managed to remain a net exporter of steel, selling 18.4mn tonnes of finished steel overseas against imports of 14.8mn tonnes. Nevertheless, exports are down by almost twothirds compared with a year ago. Beijing is seeking to create three to five globally competitive steelmakers along with half a dozen steel producers to carry out mergers and acquisitions (M&A) activity within China. The government has consulted with CISA as well as with leading steelmakers, but consolidation has been progressing at a slow pace and Beijing's original plan to have at least two giant steelmakers with 50mn tonnes per annum (tpa) capacity by the end of this decade now looks an unlikely target. The annual capacity of China's leading steel producers range from 27mt to 35mt. In October 2008, state owned Shandong Iron and Steel Group took over local producer Rizhao, raising its capacity to 29.3mn tpa and making it China's third largest steelmaker after Baosteel (35.4mn tpa) and Hebei Steel Group (33.3mn tpa). Wuhan is now fourth at 27.7mn tpa. The continuing threat of overcapacity has forced the Chinese government to revise the steel industry's guidelines on consolidation. A policy has now been drafted focusing on the implementation of production curbs, elimination of obsolescent capacity and technology upgrades The objective of the government is to stabilise domestic steel prices so that the industry is in a better shape in negotiating iron ore supplies from the big three suppliers, BHP Billiton, Rio Tinto and Vale. However, it was unsuccessful in achieving this goal in H109, with banks failing to respond to calls for restrictions on credit to steel enterprises that are disregarding the market. BMI shares the government's concerns over the impact of short-term volatility and the desire for better management.
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