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H1-H2 2012 China Steel Industry Collateral Damage & Expectations

Global Iron Ore & Steel Research House

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A Publication of OreTeam Research
Fundamentals weak for China, H2 likely to hold slow

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Back in May 2012, OreTeam had indicated through its forecast report that till July China may not witness any major movement in the iron ore spot prices and the market is actually following on the same path. Prices are still holding weak, buyers are not showing interest and offers are slipping on a daily basis. Things are not relatively good even now as we look beyond July. Although there are few positive signs indicating a reasonably upward push but the downward forces along with the lack of fundamentals may not allow much of a positivity to prevail in the weeks to come. Starting with the negative trends we have the declining demand growth for steel from both domestic and international markets for Chinese produce. Demand from the west has been slow, the growth in demand from this region is expected to remain subdued for atleast another 4-6 months. Oversupply due to the increase in production on the expectations of a good demand is the second major reason for the current market situation. Europe As per the latest report released by Fitch Ratings, the demand for steel will remain depressed across Europe in H212. Non-integrated steel producers will be particularly affected by high raw material costs and lower steel prices for the remainder of 2012. Fitch expects continuing negative pressure on market conditions and economic growth in developed markets (notably the eurozone) to continue to depress demand for both long and flat products to end-2012. European flat steel prices remain weak despite the hikes announced by some mills while long steel prices have stabilised after the scrap led June declines. Imports are also at low levels due to weak demand and better opportunities for CIS mills' in the Middle East. The last four to five weeks have seen further production cuts announced by Arcelor Mittal, TATA Steel, ThyssenKrupp and Lucchini. Statistics reflect that in the first 5 months of 2012, EU imported 6.21 million tons of finished steel products which was 33.98% down as compared to 2011.

European Data for 2010-13

USA Not just Europe, even imports by USA have seen a slight fall in June as compared to the start of this year. Indicative figures from US show that the June imports of 138700 tons of steel mills products were lower than that of May by nearly 11% where as on a half yearly note the same imports were up by 75%. Considering the fact that US accounts for 3.7% of the Chinese steel mills produce the increase in the imports from US in the initial 6 months decreased some of the concerns of demand in H1 where as going into H2, the same demand from US is seen to be slowly cutting down adding on further burden.

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reTeam Publication
A Publication of OreTeam Research
Fundamentals weak for China, H2 likely to hold slow

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US Imports of all steel mill products from China in 000 tons

S. Korea Moving towards the figures from South Korea, which imported nearly 24.3% of Chinas steel mills produce in 2011, has only been able to take up 20.2% till now in 2012. The major dent to the ship building industry in the country has lead to the fall in the demand from S. Korea in this year. Domestic sales of steel products in South Korea declined 4.7 percent on-year in the first five months of the year due to prolonged economic uncertainties and weak demand. Even the South Korea's central bank sharply cut its 2012 economic growth outlook to 3 percent from its earlier estimate of 3.5 percent as exports are feared to lose steam amid the protracted eurozone debt crisis. Adding to the problems is the fact that Dongkuk Steel Mill Co., the country's third-largest steelmaker, shut down a 1 mtpa steel plates plant. Other steelmakers such as Hyundai Steel Co. are striving to increase exports to SE Asia and new markets to make up for a decline in domestic sales.

Reducing share of Korea in Chinese steel exports in Apr2012

Domestic China Fixed-asset investment in China's railway sector fell 36.1 percent year-on-year to 177.75 billion yuan ($278.68 billion) in the first half of this year, 100.37 billion yuan less than the same period in 2011, according to the Ministry of Railways. Investment in railway infrastructure amounted to 148.71 billion yuan, down by 38.6 percent year-on-year. Along with these indicators headline GDP for Q212 was at 7.6 percent, lowest in the last three years.

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Along with the railways, the slowdown in the GDP can be attributed to the slow development in the construction & property sec tor. Property investment growth slowed to 16.6 percent in the first half of 2012 from 32.9 percent growth in the first half of 2011. Newlystarted property construction slumped 16.3 percent in June from a year earlier, deepening the downtrend after a 4.6-percent slide in May.

Chinas iron ore imports vs crude steel production

IMPACT ON IRON ORE & STEEL The impact of the slowdown due to the reasons discussed above is visible in the steel and iron ore market throughout China and elsewhere. Several Chinese steel mills have plans to reduce their spot iron ore import volumes and maintain lower inventory levels. Until recently there was a confusion in the market whether to cut prices and continue with the production capacity or cut the capacity and maintain similar pricing levels. The entire market priority has moved to curtail losses. Rebar & billets highlighted as the primary building units have failed to attract good sales due to the slowdown in the sector activities and supply glut in the country. Falling rebar prices indicate the decline in the construction activity and billets emerge as a key indicator of the deteriorating primary steel industry. Both are the reflection of the fact that steel demand growth has slowed down sharply in China in 2012, from average double-digit growth over the past decade, to just 4% forecast for this year. China crude steel production was seen at 356 million tons in the initial 6 months of 2012 whereas the same figure was 353 mil lion in 2011. There is a moderate increase of nearly 1% in the total production. On the other hand iron ore imports were seen at 367 million tons between the same period in 2012 and in 2011 the figure was 334 million. An increase of nearly 10% in iron ore imports but only 1% in the indicated steel production with domestic iron ore production keeping nearly at the same levels in the given period. Definitely the raw material burden would also add up to the steel mills worries, sooner or later. Steel production also peaked to above 2 million tons continuously over 2-3 weeks on daily basis adding more surplus steel inventories. From steel now to weather, where some regions due to the heavy rainfall and high temperatures have had a deep impact on construction projects, further diminishing demand for steel materials. Leading steelmakers including BaoSteel, Shagang and Hebei Steel Group, decided to cut ex-factory prices by a greater extent to keep their capacities running and retain diminished margins which has resulted in continuous fall in the steel prices. Another example of the losses incurred by Chinese steel comes in the form of Ansteel which is projected to have a net loss of 1.98 billion yuan in the first half of 2012 in reflection to a year-on-year 12 percent decline in the selling figure of steel products. Similarly, Lingyuan Steel and Sinosteel Jitan have foreseen net losses of 232 million yuan and between 44.50 million and 46.50 million yuan respectively during the same period. In the first five months, the profit margin of key domestic steelmakers dropped by 94.26 percent to 2.53 billion yuan.

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A Publication of OreTeam Research

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China Industrial revenue vs profit scenario

FAW Car Co Ltd, is expecting a loss of 45 to 75 million yuan ($7.1 to $11.8 million) in the first half of 2012 were as Beijing Shougang Co Ltd is likely to witness 250 to 350 million yuan, against a backdrop of wide spread steel industry weakness. REBALANCING SCENARIO Chinese Government has been trying to pacify the situation by bringing back some of the affordable housing projects and sounding news of increasing investments in railways and infrastructure. But the actual ground reality and the extent of the demise in the steel prices may take considerable amount of time to recover. Considering the same problems and the time required for any policy features to take shape by Beijing, it is expected that H212 may remain slow and growth worries will continue to haunt the global economies. Market participants are expecting for a stimulus from the government and easing some of the policy measures introduced by Beijing but the overall conclusion is not expected to be in the favor of the Chinese industry in the short term. H212 is expected to heal some of the damages but anticipating a good growth is quite a tough ask. Current situation is not similar to 2009 where introduction of a healthy stimulus gave way to an robust industrial growth. Both suppliers and consumers of iron ore were sitting in the same court during that period where as currently the suppliers are relatively in a better situation than the consumers. This would certainly have an impact on the iron ore prices going further. Weakness in the steel prices will take time to consolidate and during that time, market has to recuperate from the losses and try and attain a definite direction. It would certainly take time for the revival of the steel demand as the next few weeks will be holiday weeks in Europe, Middle East & Turkey and any policy developments in China will take time to implement and start showing results. Manufacturing is at the forefront of the current slowdown in China, but earnings might get better as early as the first quarter next year as progrowth policies start taking effect. Rest of H212 may just pass away in the similar manner. With GDP in Q112 at 8.1 and Q212 at 7.6 which is slowest since 2009, it is expected that the country may recover slightly i n the coming quarter but again the commercial banks which were stunned by People's Bank of Chinas asymmetrical interest rate cut are now worrying about their own shrinking net interest margins. There is an indication that consumer prices will continue falling, burdening companies to carry on destocking, with total inventory levels declining further to below their historical average and margins may not pick up until the consumer prices bottom out, nearly towards the end of the year.

Corporate Office: OreTeam Exim Private Limited, Newbridge, 1st Floor, Tower B, INOX Towers, Film City, Plot No.17,Sector-16A, Noida-201301. India. Delhi NCR. For more Info - contact Prakash (prakash@oreteam.com) & For Subscriptions contact- Monica (subscription@oreteam.com) Copyright- OreTeam, India.