ASSESSMENT OF CURRENT STEEL MARKET CONDITION IN CHINA

ESTHER SIM YEOW MIE MIE +65 6499 5514 +65 6499 5520

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• Based on historical data on floor space under construction. Oldendorff Research 2 .CHINA STEEL & PROPERTY MARKET Steel Consumption for Property is Stronger in First Half of the Year 2010 China Steel Consumption Breakdown Others 12% Home Appliances 2% Shipbuilding 3% Metal Accessories 3% Automobile 6% Estimated Steel Consumption by Construction. NBS. WSA. as % of Total Steel Output 60% 1H 50% Property 32% 2H 40% 30% 20% 10% Machinery 18% Inf rastructure 24% 0% 2007 2008 2009 2010 • China’s property sector accounts for 30-32% of total steel consumption on average per annum. Source: DB. • Crude steel required property constructions tends to be stronger in first half of the year than second half. we estimate crude steel consumption for property in first half accounts for about 50% of steel production in the same period whereas second half is only 15%.

CHINA STEEL & PROPERTY MARKET Robust Property Construction in Jan-May Consume 47% or 67Mt More of Steel than 2010 Growth in crude steel required for property surged 47% ytd China's Crude Steel Output.RHS Crude Steel Req Y/Y % Chg . NBS. Oldendorff Research 50% Total Crude Steel Output Est Crude Steel Required for Property Under Construction Total Crude Steel Output Y/Y % Chg . Mt. 2008-2011 350 300 250 200 150 100 50 0 Jan-May 08 Jan-May 09 Jan-May 10 Jan-May 11 Source: WSA.RHS 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 3 .

Affordable Housing Construction will Cushion Potential Slowdown in Residential Construction. Excluding 4m shanty town renovation units. Mt.CHINA FIXED ASSET INVESTMENT Growth in Investment in New Projects and Constructions Are Slowing Ytd China's Investment in Construction & New Projects Normalizes China Construction FAI.May 2011 120 100 80 60 40 20 30 0 -20 Jan 08 • Crude Steel Production (RHS) No of Construction Projects Investment in Construction Projects No. which translates to about 4 23Mt of crude steel. Jan 2008 . up from construction starts of 5. it is lower than the 27% growth in 2010. China’s main priority in the 12th five-year is to control growth of production and capacity. the remaining 6m units are net new supply. The delay effect of government’s winding down of easy money policy could slow crude steel production in 2H11. of New Started Projects Planned Investment in New Projects 70 Source: National Bureau of Statistics Fall in investment 60 growth due to weak economic outlook & high inflation 50 40 20 Mai 08 Sep 08 Jan 09 Mai 09 Sep 09 Jan 10 Mai 10 Sep 10 Jan 11 Mai 11 China’s investment in new projects is slowing. The central government early this year pledged to build 10m units of public housing in 2011. Crude Steel Production. in a bid to stabilize home prices.9m units in 2010. While China’s planned investment in new projects posted 17% growth ytd. y/y %. • .

CHINA PROPERTY Price Cuts from Developers Salvage Potential Drop in China Property Transaction Volume Weekly Transaction Volume of 35 Major Cities in China Source: DB. Soufun 5 .

LAND PRICES Land Prices in Top Cities Cool on Property Tigtening Measures Land prices in Beijing and Shanghai started falling after 3rd round of tigtening Floor Price of Residential Land. 2010-11 10000 Beijing 8000 Shanghai Chongqing Hangzhou 6000 4000 2000 0 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Source: Soufun 6 . Rmb/Sqm.

Oldendorff Research 7 . U$. 2009-11.PROPERTY DEVELOPERS Property Curbs Weigh on Share Prices of Chinese Developers Concerns over govt policy drag property developers Share Prices of China's Major Developer. Rebased=Jan 2009 400 Vanke 350 300 250 200 150 100 50 Jan-09 Agile Guangzhou R&F Yanlord Land COLI Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Source: Bloomberg.

LBH Group 8 .4 2. China iron ore import from NAFTA surged 306% YTD from 1.9 • Import from Majors Up 0.3 1. Malaysia). However.8 7.8 Y/Y % chg 25.5 6. • Import from Non-majors Up Sharply 19Mt or 52% YTD to 56Mt. China’s iron ore imports from Brazil and Australia up 16% and 5% YTD to 50Mt and 89Mt respectively.6 4.8 2. South America (Chile & Peru) & CIS.0 49. Mt. Source: GTIS.8 40. Mongolia.0 6. Brazil & India Others % of imports f rom Big 3 (RHS) 85% 90% 14 Iron ore import from NAFTA almost triple YTD China Iron Ore Imports. Other noticeable increased were from Iran.6Mt to 5. Asia (Indonesia.CHINA IRON ORE TRADE REVIEW More Supply of Iron Ore From Other Regions Going to China Rising share of imports from other countries China Iron Ore Imports. YTD '10-'11 Jan-Apr 2010 12 10 8 Jan-Apr 2011 65% Jun 08 Nov 08 Apr 09 Sep 09 Feb 10 Jul 10 Dez 10 China Iron Ore Imports South Africa Asia CIS South America NAFTA Iran Jan-Apr 2011 Mt 11.3% YTD to 174Mt.9 6.2 Jan-Apr 2010 Mt 9.7 9. Jan 08-Apr 11 60 50 40 80% 30 75% 20 10 0 Jan 08 70% 6 4 2 0 South Africa Asia CIS South America NAFTA Iran Aus. Monson Agencies. India iron ore down 23% YTD to 36Mt due to railway transportation and Karnataka export ban effective from July 2010 till April 2011. Mt.4 Diff Mt 2.6Mt or 0.3 40.9 5.9 1.3 7.0Mt.1 306.6 4.0 42.9 2.8 9.

this is not surprising as activity in the property construction is usually more active in the 1H of the year. However. we feel that the likelihood of slowing steel demand for property construction is reasonably high.CONCLUSION We Still Believe that China Property Construction will be Slower in 2H. • Assuming that Vale & Australian miners continue to raise their export in the 2H (after a poor 1H due to seasonable factors). • With a number of proxies (FAI. it is unlikely to be sufficient to absorb new deliveries. property under construction remains strong so far as we head towards the 2H of 2011. iron ore import by China remains robust in the 2H. • This could provide some support to the Capes. property transactions) for liquidity already slowing down since end of last year. loans. Hence Lower Steel Output • Due to strong property demand last year. This could mean that despite slow down in the demand for steel used in the property construction. 9 . a flat/slowing Chinese demand could lead to softening in iron ore prices (especially that the Karnataka ban is lifted). • The lower prices may encourage China to substitute more local ore with import. But longer term.

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