Review ofChinas long products market situation
After a strong start to the year,
Chinas domestic steel prices began losing ground in second quarter. On June 24, 2005,
Chinas 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 indexs 96.34 points at the end of June shows a decline of 12.62 percent (13.92 points) since the end of March. Beijings macro control policies can be blamed for much of the large price fluctuation of long products.
Chinas long products market presents the following characteristics: First, closely related with fixed asset investment,
rebarand
wirerod 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
wirerod was RMB 3617/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 3736/ton ($451/ton). Second, there are noticeable variations in price among
Chinas many provinces. Long products prices took a greater hit in Eastern and Northern
Chinathan elsewhere. Towards the end of June the price difference between Eastern and Northern
Chinaand the rest of the country had widened to nearly RMB 400/ton ($48/ton). The average price of 20mm
rebarin Eastern
Chinawas RMB 2956/ton ($357/ton) versus RMB 3388 ($409/ton) in Southwestern
China. Third, long products prices in Eastern
Chinaand Northern
Chinain June fell below the industrys average
manufacturingcost. On June 27, 2005, the market price of 6.5mm common
wirerod in Shanghai was RMB 3140/ton ($379/ton) and in Beijing was RMB 3100/ton ($375/ton). At the same time, the average
manufacturingcost including taxes was RMB 3400/ton ($411/ton), meaning those enterprises that relied upon
longsas their main product mix likely suffered losses. The following are several factors that affected
Chinas 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,
Chinas 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,
Chinas
rebaroutput totaled 26.09 million tons, up 16.29 percent year on year, while its
wirerod output totaled 23.37 million tons, up 22.71 percent year on year. On the other hand,
Chinas apparent
consumptionof
rebarduring the same period grew only 14.13 percent, while the apparent
consumptionof
wirerod showed a 17.57 percent growth. The growth in apparent
consumptionof both products failed to keep pace with the capacity expansions, thus contributing to the oversupply situation that currently exists in the market 2. Steel
manufacturingcosts 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 oreprices; a short coke supply that led to rising coke prices; and a
pig ironand
scrapmarket 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 orein certain regions dropped nearly RMB 270/ton ($33/ton) to hit RMB 680/ton ($82/ton).
Scrapprices slid to RMB 2115/ton ($256/ton) from RMB 2700/ton ($326/ton), while common carbon
billetprices have declined to RMB 2800/ton ($338/ton) from RMB 3600/ton ($435/ton). Taking the drop in
manufacturingcosts into account, the decrease in steel prices seems reasonable. 3.
Chinas 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,
Chinas steel enterprises have consequently adjusted their ex-factory prices downwards to promote sales.