Next Year’s Steel Market Will Primarily Be Stable with Slight Turbulence

Near the end of the year, domestic steel market is modest, the prices of main varieties of steel in major area generally remain stable. Unfavorable factors such as seasonal demand off-season and large market supply make steel mills and traders careful about the expectation for the next year-- next year’s domestic steel market is expected to be primarily stable with slight turbulence.

Supply pressure is difficult to ease

A few days ago, in an industry conference held in Shanghai , an analyst of an inside organization made a prediction about next year’s steel market resources distribution: on the one hand , the wild situation of domestic steel market will continue, in which the " north steels go southwards " and  "east steels go westwards " situation will also become normal ; Steel export volume, on the other hand , will remain at a high level .

In this year, according to the insider, the capacity utilization of domestic iron and steel enterprises is around 72%. Since current domestic steel capacity is more than 1 . 15 billion tons (some alleged that it’s 1.2 billion tons ), the annual output is expected to be 828 million tons. The insider said next year’s capacity utilization of steel mill will be flat with 2014. That is to say, at least the same amount of resources will be put on the market next year, so the pressure of market supply should not be underestimated .

In addition , due to higher-than-expected steel exports of this year, annual exports being more than 90 million tons , the domestic supply pressure is greatly reduced.

But the insiders are not sure whether this situation of steel exports in the coming 2015 will continue. The main reason is that many countries and regions have called anti-dumping and anti-subsidy investigation for our steel exports, and their local iron and steel industry association have been suggesting the government to adopt certain countermeasures for our steel. And most of our exported steel products are low value-added products, which is one of the important factors for next year’s instability. Therefore, once the export situation changes, the domestic steel market will first be squeezed by the resource supply.

Inventory pressure will be transferred to steel mills

Due to this year's favorable steel prices, since the domestic steel market has begun de-stocking , the social stock of main domestic markets continues to fall ( except for holiday rise during the National Day, as shown in Figure 1 & 2 ). this situation continues up to now , which is never seen before. Moreover, the insiders believe that the inventory pressure of future steel market will be transferred to upstream of the production chain--steel mills, the situation of which will become the norm.

For steel traders , "winter inventory" is also likely to be a thing of the past . Relevant personnel of Shanxi Jincheng Steel Holding Group (hereinafter referred to as JinGang )says , traders now have no concept of " winter inventory ". " Since 2010, traders hold 'winter inventory' every year, and they lose money. In recent years, the Banks have been tightening lending , making " winter inventory ' unaffordable; also, traders dare not hold it due to the depressed market."

Steel mills hold the same attitude . Inventory means excessive use of funds, thus inventory level of steel mills will not be high basically. An insider from Shandong Shiheng Special SteelGroup Co. Ltd. said, stocks being transferred to steel mills this year resulted in much pressure, furthermore, they will not stock up even during Spring Festival because they take low inventory as prime strategy.

The insider from JinGang, however, thinks that it’s better for steel mills " save something" for their own, rather than offering preferential policies to attract traders to hold "winter inventory". According to him , JinGang’s inventory after every Spring Festival is always about 350000 tons .

Demand is still expected to be large

When it comes to the demand of next year’s steel market, a director of the Railway Engineering Branch of CCCC Third Harbor Engineering Co. Ltd. ( hereinafter referred to as the Railway Engineering Company) said the steel demand in 2015 is still expected to be large despite of the unprecedented difficulties encountered in2014.

He thinks that a high-speed rail investment of nearly 2 trillion yuan is to be completed in accordance with the twelfth five-year plan, so next year’s railway investment and construction still have a long way to go. In addition, local governments are also strengthening infrastructure construction. For example, the investment of Foshan Metro Line 2 project just signed is estimated to be nearly 20 billion yuan . And shenhua group joint investment by China railway corporation of a railway line connecting Inner Mongolia and central China, co-invested by China Railway Corporation and Shenhua Group, is also under planning. This line will be mainly used for coal transportation. Also, the time limit for these projects is generally short, which is about a year and a half to two years.

"Now, most of the architectural design institutes are putting in extra hours to draw the blueprint." The director said. So, steel demand of the construction industry in 2015 is expected to be huge. He thinks that, counting out design time, when relevant projects started in around next year’s April or May, the demand pull will gradually be seen.

Ore prices will continue to fall

This year , the iron and steel enterprises are profitable largely because the iron ore prices drop further than steel price do. Up to December 22 , imported ore price of Grade 62.5% Newman ore fines in Qingdao Port has dropped to 500 yuan / ton , falling by 45 % compared with the start of this year . While prices of HRB400ф20mm thread steel over the same period declined by 20 %.

Then , how will iron ore market situation in 2015 be?

Most insiders think that prices of iron ore next year will continue to fall. Ore prices this year have fallen to record low, but the production expansion rate of foreign large mines doesn’t shrink , on the contrary, they further the expansion and reduce their costs by cutting capital expenditure. This means that the iron ore resource supply will still increase next year.

At the same time, although presently a lot of domestic small to medium-sized mines with high cost closed down due to mismanagement because of the continually downward iron ore prices, large and medium-sized mining companies are still competitive. As Jiasheng Yang, president of Metallurgical Mines Association of China, previously told reporters from China Metallurgical News, some large mines of China have strong competitiveness, which means that the production of domestic mine will still keep up.

Basing on the above conditions, the insiders generally believe that there are still rooms for iron ore prices to go down.

Parties have different opinions on aftermarket

About market expectations toward the end of the year and the coming year, steel mills are generally cautious, while some staff are pessimistic.

For example , Tonglai Wang, chief of information department of Tangshan Guofeng Iron and Steel Co. LTD., said , steel prices won’t rise or drop dramatically within the year, but it is difficult to predict the long-term situation. He revealed, however, the production of their enterprise keeps normal pace, while inventory is low, which means the sales go well.

A salesman from PanGang also says that thanks to strategy of localization, steel orders and sales are relatively stable. He also thinks that steel market prices won’t rise or drop dramatically within the year, steel prices will fluctuate within a relatively small range. Head of a Shandong private steel company made it clear that his expectation towards the steel market of 2015 is relatively pessimistic: "No signs of spring have been seen yet."

While attitude of steel traders is very straightforward - as an insider, who have long been focusing on steel spot market, told China Metallurgical News, Dabaishu market --the once largest Shanghai steel market – previously had more than 500 steel trade enterprises, but to now only 100, the number reducing by over 80%. "First-tier traders generally believed that the market is unlikely to improve, and chose to exit the industry." The insider said.

However, the head of Railway Engineering Company is relatively optimistic about 2015. He thought next year’s steel prices will climb up. In the first half of next year, due to the unfulfilled design and funds, steel demand won’t be quite pulled; but in the second half, the infrastructure construction will boost steel demand and drive up the price. However, with oversupply being real, it isn’t expected that there’s much room for price to rise. ( Source : China Metallurgical News )