It is reported that Chinese hot rolled steel coil prices saw swift decrease in the first working day after New Year holiday. In Shanghai, forward steel market prices are leading the drop. HRC price on shanghai steel exchange center drop by CNY 250 per tonne from top level of CNY 4050 per tonne within three trading days.
Spot steel market prices followed suit and there has been a fall of CNY 140 per tonne to CNY 150 per tonne for commercial 5.5mm up HRC. Most are wondering whether the rebound has been over and there would be another dive.
The following reasons and facts may explain the price drop this week.
A) Further global economy recession has added to pressure of drop in steel exports. USA has witness a 3.8% drop in its Q4 GDP, while Britain is on the verge of bankruptcy if there is no evident improvement. Under such circumstances, it is reasonable for some traders to secure part of profits at current high level.
B) Fast increase of inventory. Statistics by Mysteel show that HRC stock jumped by 8.6% to 517,000 tonnes this week. At such a speed, the total stock would reach 620 thousand ton soon since there is not much demand until middle February. So people would be nervous with such a swift increase.
C) Increase in supply. Output for January went up to 41.5 million tonne, which compares with 37.8 million tonne and 35.19 million tonne for last December and November respectively. Such a trend would lead to much more supply than demand in May or June.
D) More imports. A lot of low priced cargoes are going to reach China in next three months and they are expected to exert adverse impact on domestic market especially when exports see no evident improvement.
E) Higher domestic market price than those in overseas countries. Price for 2.75mm HRC on Shanghai market is equivalent to USD 606 per tonne which is higher than USD 581 per tonne in USA and USD 583 per tonne in the EU. Hence it is quite hard for China to export and this would certainly lead to worry on less demand.
Despite above mentioned factors, HRC price is not always going to see substantial decrease as there are also advantageous aspects which would play a dominant role in the longer term
1. Supply would not exceed demand in Q1. The crude steel supply in 2H 2008 is merely 208 million ton, down 20 million ton from the same period of 2007. There is a gap of 10 million ton despite less demand as a result of economy slowdown. Hence steel makers have been producing more to meet the gap.
2. The total crude steel supply is forecast to be 115 million tonne in Q1 2009, which is 10 million lower than the same period of last year. Of course, we have not taken into account the export volume. Anyway, the effective supply volume will be lower than that for Q1 2008. In addition, more steel makers are put emphasis on producing more construction steel product, which could be proved by the record high output for rebar in last December. So to resume full production of HRC takes more time and it is in the interest of HRC price increase.
3. Further, Beijing has invested another CNY 230 billion to stimulate domestic demand. Auto and steel industry revival plans have been set and they are going to be put into force soon. At the same time, industrial added value has been on the rise and this would lead to more steel consumption. In addition, monetary policy is in the interest of steel market. New added credit during last November and this January has witnessed substantial increase. That for January probably would reach CNY 1200 billion. Meanwhile, M1 and M2 have also rebounded. So there is no credit crunch now and there are enough capital for economy growth.
To sum up, there is not expected to be pressure of oversupply in Q1 and steel consumption would remain stable. Steel prices often tend to go up in Spring and it is not going to break rules in 2009. As long as real demand return since middle February, HRC inventory level would drop soon and there would be another round of price increase.