Iron & steel industry to continue downturn in H2

Aug 21, 2013

According to data from Ministry of Industry and Information Technology, the accumulative crude steel output nationwide was 390 million tons in the first half, growing by 7.4 percent year on year and the increasing rate is 5.6 percent higher than the same period of last year. The crude steel output of key large- and medium-sized iron and steel companies increased by 5.5 percent year on year, although being nearly 2 percent lower than the average national growth rate, still 60 percent of the production increase was from such enterprises.

There has a huge release of production capacity of crude steel since this year, which hit new record high in February and remained at a relatively high level from March to June in spite of certain drop. It has resulted in the imbalance between the marked supply and demand, and steel price has gone into downward slide and has declined slightly for over four months. Zhang Changfu, Secretary-General of China Iron and Steel Association, introduced that as of July 26th, steel price index was 6.6 points lower than the level of the year beginning. Prices of 8 steel varieties, which are the statistic focus of CISA, all had different degrees of decline in comparison with the year beginning and the average decreasing rate was 5.7 percent.

In the first half year, the contradiction of market supply and demand has been extended to the circulation fields, and inventory of domestic steel continued the growth trend at the end of last year. Inventory of key enterprises hit new record high in middle of March and had little decline in Middle of June, but also increased by 29.9 percent than the year beginning.

At the same time, price of import ores decreased far less than steel price of the same period, the production cost of enterprises remained at a high level. Such factors has caused the month by month decline of the enterprises' profiting level, in which the profiting of key large and medium sized steel enterprises is far inferior to the overall industrial level and was taking on month by month decline trend.

In general, it is difficult for iron and steel industry to bottom out in the second half year.

The lower pace of macro economy growth, the financial market vibration caused by "money shortage" of the banks, and the influence of financial strain on real estate investment and infrastructure construction will continue a relatively long time. Moreover, July and August have been a traditional off season for demand, thus it is difficult to improve the demand of iron and steel industry effectively in a short period of time.

At the same time, release of domestic iron and steel production capacity is going on. Iron and steel enterprises don't have enough impetus to reduce production in the event that they still have marginal profits, and the daily crude steel output is hard to go back to 2 million tons below and the inventory of steel factories will remain at a relatively high level, which will intensify the overcapacity conflict. Under such dual factors as high output and low demand, steel price shall remain at a low level, and the profiting capability and the industrial operation status are hard to be improved obviously.

On the one hand, steel price goes on declining, enterprises are running hard in respect of production and operation or are even in loss condition. On the other hand, the production capacity is releasing rapidly and enterprises have little willingness to reduce production. The main reasons are that iron and steel enterprises are worrying about loss of market share and close of loans by banks, and they are counting the marginal benefits. Looking at the whole industry, almost no enterprise has actively reduced production, the rapid release of production capacity has resulted in the continuous depression of steel market.

On June 19th 2013, Executive Meetings of the State Council confirmed the prohibition of new credit-line to the illegal construction projects of industries with serious overcapacity. At present, banks have tightened credit scale, it is more difficult for iron and steel enterprises to obtain bank loans, and the direct financing cost of short-term financing bonds and mid-term bills are rising markedly. Voices from steel enterprises nationwide has reflected capital chain tension, some enterprises have stopped production because of capital chain breaks.

Moreover, a large number of steel enterprises cannot meet the new environment protection requirement, and cost for production and operation will have further increase because enterprises need to enlarge environment protection input. Some urban steel plants are in the face of relocation pressure that is intensifying day by day.

Currently, the structural adjustment of iron and steel industry is extremely urgent. MIIT said it will focus on solving the overcapacity conflict in the structural adjustment of iron and steel industry jointly with relevant governmental departments. It will cooperate on the formulation and implementation of The Overall Plan of Resolving Overcapacity Conflicts and relevant comprehensive policies and measures, further carry out The Twelfth Five-Year Development Plan of Iron and Steel Industry, ensure the smooth implementation of all targets and tasks, promote the standard management of iron and steel industry steadily, create a market environment with fair-competition for the enterprises, promote the upstream and downstream cooperation of the industry, spread the use of high-performance steel, promote the upgrading of steel, reinforce the security of iron ore resources, support the construction of Chinese iron ore spot trading platform, support the technology reform, energy saving and emission reduction, and elimination of backwardness of enterprises, and promote the structural adjustment of iron and steel industry.

Source: China Economic Net