Deficit Is Haunting Steel Industry

China’s steel industry continues to suffer deficit this year. According to the latest estimation, the total exports amount of steel this year will see a year-on-year decrease of 80%.

The steel price in early March has fallen to the same level in 1994.”

In the executive director’s conference of the China Iron & Steel Association (CISA) held in the late March, Shan Shanghua, Secretary-general of the CISA, said that the release of production capacity has been strictly restrained by the decreasing market demand and the steel export has been seriously influenced by the international market; the steel price can not get rid of the restriction from the supply and demand contradiction; and meanwhile, the benefit of the steel enterprises is greatly restricted by the inconformity between the prices of the raw materials and steel. That means China’s steel industry has encountered the toughest period in the first half of this year.

Shan also said: “the deficit of the steel industry has not seen its end. China is very likely to be a country with the amount of imported steel larger than the one of export in March. The exports amount of steel in the whole year may decrease by 80%.”

Deficit Continues

Though having experienced the drastic decrease of the steel market in the second half of last year, the steel enterprises, which used to set limitations on their productions, recovered their productions because of the upsurge of the steel price in the beginning of this year. According to the report from the CISA, the total amount of crude steel produced in China in January and February was 81.98 million tons, with the daily production amount of 1.39 million tons. Based on this, the whole year’s steel production amount will be 507.24 million tons and the daily production amount is higher than last year’s 1.37 million tons.

“The growth of the production amount in January and February was too fast. Not only the small- and medium-sized enterprises, but also the large state-owned enterprises recover their productions too fast. Judged from the development trend, the production amount in February was larger than January and furthermore, if the daily production in late February could be continued, the yearly production amount could reach 550 million tons,” said Shan Shanghua. According to him, such a kind of supernormal and irrational production has caused serious result: the price of the imported ores has increased by 10 US dollars and seldom sees decline. The enterprises have production amount but no benefit. The reserve amount increases while the price decreases.

According to the survey made by the CISA in late February, the reserve amount of five categories of steel in the twenty major cities of China had reached 6.70 million tons by then, with a month-on-month increase of 1.84 million tons or 37.9%. Of them, the reserve amount in the domestic markets was 5.90 million tons, increased by 41.7%; the reserve amount in the harbors was 800 thousand tons, with an increase of 15%.

With the increase of the reserve amount, the market price started to fall. Till March 5, the comprehensive price index of the steel in China fell by 7.43% compared with the price in middle February, of which the long steel’s price fell by 7.83% and the one of plate steel fell by 7.60%. The price index was as low as the one in middle November. Therefore, the steel production enterprises have to bear the large-amount deficit. It is known that some large steel producers, like Baosteel, have already lowered the ex-factory price of their products.

According to Shan Shanghua, the whole steel industry in China saw a deficit of more than 1 billion yuan (USD 146.35 million) in January. Some large enterprises suffered larger deficit. The plate steel producers lost 300 to 400 million yuan (USD 43.9 to 58.5 million). What’s worse is that the loss may be larger in March. “The enterprises suffering great loss in January are mostly large ones producing hot rolled steel plates while the small- and medium-sized enterprises which produce the long steel generally saw profit in the same period. However, those enterprises are also on the rim of deficit in late February.”

“Presently there are some abnormal phenomena in China’s steel industry. The steel production amount grew so fast that it has outnumbered the market demand,” said Shan Shanghua. Because the new large projects in the beginning of this were all plate steel projects, a large surplus occurred to the production capacity of the hot rolled steel plate. The measures of limiting production and keeping price are necessary.

Drastic Decrease in Export

The CISA points out that the situation of the European, American and Japanese markets are more serious than China, which means the situation of steel export is not optimistic. According to the data from 25 large steel export enterprises, 60% of the export steel in January was due to the continuing contracts. There are a small number of newly-signed contracts. It is estimated that this year’s exports amount of steel will be lowered by 80%, much larger than previously estimated 50%.

“According to the survey on Baosteel and the other 27 large steel enterprises, the delivery amount in March is estimated at 299.1 thousand tons and in April it is at 129.6 million tons. In March China is very likely to become a country with larger imports amount of steel than export,” said Shan Shanghua. Therefore, the CISA suggests adjusting the taxation policy of the steel export and increasing the tax rebate rate of the products with large added value.

The government carried out the policy of exempting, withholding or returning a 17% value-added tax for the steel of the processing trade enterprises in 1999, in order to deal with the Asian financial crisis. This policy lasted till July 1, 2005, and then was cancelled because of the changes in the market. In the CISA’s opinion, the government should re-implement the policy as soon as possible.

Besides, the imports prices of the foreign steel and steel billets are very low so that their import amount seems to have a large increase in the future. The CISA advises the government to take the anti-dumping measures to lessen the impact of the import steel.