Low point of the recession now overcome: The steel sector is recovering
The Chinese steel sector is recovering from the recession, at least for the time being. Since hitting rock bottom in mid-November 2008, prices have significantly recovered, the warehouses have reduced their excess stock, and companies are hoping that the government’s infrastructure programme will help them overcome the crisis, reports the ‘Asien Kurier’ in its March edition. The steel recycling sector will also benefit from the upswing.
(01.06.2010) Price announcements by Baosteel are considered a barometer for the sector in general. And prices for March contracts were raised almost without exception. This was the second contract increase this year, and observers assume that the low point of the price and purchasing declines has now been overcome.
Compared with the low point of price declines in mid-November 2008, by mid-January recovery of up to double-digit figures was in swing; only the price recovery for seamless pipes still seemed to be lagging behind. In detail, March prices rose by 300 renminbi per ton for hot-rolled produce and by 350 renminbi for cold-rolled products. "Following the all-time low in November, the steel market has shown an upwards trend again," Di Yi Caijing Ribao (China Business News) is quoted in the ‘Asien Kurier’.
Evidently, both steel clients and manufacturers have continuously reduced their warehouse stock in the past months, as manufacturers are subsequently experiencing new demand. The sector is drawing hope particularly from the large infrastructure projects that the government intends to carry out as an economy-supporting measure.
Additional alleviation can also be expected as a result of strongly declining ore prices. Mid-January saw the commencement of talks on the iron ore contracts for 2009. Under the leadership of Nippon Steel, large suppliers Vale, BHP Billi-ton and Rio Tinto will be forced to reduce their prices by at least 40 percent over the 2008 prices. By October of last year, iron ore spot prices had already fallen from their all-time high in February 2008 of 200 US$ per ton by 70 percent to 60 US$ per ton, but have since risen again by a third to 80 US$, as Reuters news agency reports.
Nevertheless, a new boom in the steel industry is unlikely in the near future. The sector’s biggest problems – fragmented production and huge excess capacities – remain, particularly because important buyers like the shipbuilding industry have not yet bottomed out.
To support the foreign shipments of the industry, Beijing completely abolished the export duties for 67 customs tariff items as of 1 December, 2008, according to the Shanghai Zhengquan Bao (China Securities News). Even so, this year’s exports may continue to decline, as global demand for steel will likely drop further. Iron and steel exports have already almost halved, with a minus of 58.0 percent between August and November 2008. As a result, Baosteel put its large-scale project with Brazilian CIA Vale do Rio Doce on hold.
The project, signed in August 2007, envisaged the construction of a plant for the annual production of 5 million tons of flat steel in south-east Brazil. Baosteel was due to have an 80 percent share in the joint venture.
In contrast, Shougang has now completed its new plant in Caofeidian, Hebei province, and plans to produce an annual amount of 4.85 million tons of steel in the initial phase. The final stage foresees an annual production of 10.0 million tons. Since Chinese steel production in 2008 could only record an increase of 1.7 percent to 500 million tons, no – or at best only low – increases are expected in 2009. The Bureau of Statistics reports that, in November 2008 alone, the output of raw iron saw a decline of 16.2 percent over the same month of the previous year; steel output dropped by 12.4 percent, and steel products by 11.0 percent.
Following the almost certain alleviation of the situation for large steel buyers (infrastructure, building and automobile industries), analysts are now monitoring two additional sectors: shipbuilding and mechanical engineering. The Baltic Dry Index (BDI), the most important indicator for the worldwide shipping of main cargo goods like coal, iron ore and grain, slumped from its all-time high of 11,793 points on May 20, 2008 by an alarming 94.4 percent to a mere 663 points on December 5, 2008. Since then, the indicator has recovered to over 1,000 points; the effects on the world’s second largest shipbuilder, China, however, are still not foreseeable. The extremely negative trend is not only limited to shipbuilding, but equally affects the production of transport containers: here, the country provides around 85 percent of entire global exports. So far, Chinese shipyards are still working at full power. In November 2008 alone, production, for example, rose by 54.5 percent over the same month of the previous year to 2.75 million gross registered tons (GRT), and an increase of 40.0 percent to 20.4 million GRT is reported for between January and November. So far, the crisis has only partially reached the shipbuilders due to the lengthy timeframe of projects. Initial signs can therefore be derived from steel prices. Baosteel, for instance, had to reduce the prices for March contracts for thick steel plates, mainly sold to the shipbuilding industry, by a further 300 renminbi per ton.
Analysts of Hong Kong’s 'Transport Trackers', who have been monitoring shipping traffic for several years now, express fears in their current analysis (2009 Forecast: Limping into 2010) that global container traffic will at best stagnate in 2009, and that possibly a third of newly ordered ships, first and foremost bulkers, will either not be built at all or cannot be delivered to the customer. Container traffic from Asia to the USA will see a five percent decline, and from Asia to Europe even a nine percent fall in 2009, according to Transport Trackers. In 2008 there was already a 10 percent - or 1.2 million twenty-foot equivalent units (TEU) - excess capacity of container ships. As additional capacities of 10 percent are expected to be generated in 2009, the entire excess capacity for 2009 will likely lie at 20 percent. It’s not yet possible to make reliable statements for the mechanical engineering industry, as the figures for Q4 of 2008 have not been published yet. The production trend in different industries strongly suggest that this sector has also slipped into crisis these past few months. The Bureau of Statistics reports some dramatic reductions in production in many sectors in November 2008 compared with the same month of the previous year. In particular, combustion engines (-45.5%), small tractors (-42.4%), large and medium-sized tractors (-23.2%), metal working machines (-20.2%), packaging machines (-18.9%), cars (-45.9%) and engine building (-13.3%) had to sustain high losses.
An additional pointer to the economic weakness is the trend in foreign trade in machinery. According to customs reports, the volume of overseas exchange of goods declined by 13.3 percent in November 2008 over the figures for September 2008. Imports saw a significant slump of -22.9 percent, and exports also dropped by 13.3 percent.
Authors: Martin Boeckh, Gaiberg (Germany) & Bernd Schaaf, gtai correspondent Shanghai (China)
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