On the face of it, China has made good progress in stabilizing the domestic steel market since December of last year. Prices crashed in the second half of 2008 as demand fell from auto makers, housing and later consumer goods. This part of the story appears the same as in the west. However domestic steel prices bottomed in December and have since traded within a narrow range, even rising slightly in January. How has China managed to achieve this level of stability so quickly? Well maybe it is just the speed of the producers’ reaction to the drop off in demand and the fact that China does not have a well developed distribution infrastructure, which means there is intrinsically less material in the supply chain. The supply chain and hence prices therefore react more quickly to capacity cuts at the mills.
Many smaller Chinese producers have been forced out of business and the larger producers have cut production substantially according to the China Daily, although arguably not as much as in the US.Ã‚Â But the combination of major mill reductions and minor mill complete closures has had the desired effect on prices. But as the paper observes, mill cut backs are not a long term solution and the major producers should (and will) be taking the opportunity to invest in more efficient methods of production and moving up the value stream to more value add products in an effort to improve profitability. Inevitably this will mean further consolidation of the Chinese steel industry and smaller producers will not able to match the majors’ investment plans.
China’s steel producers have suffered terribly against high iron prices, a situation that has not changed through the end of 2008. The producers laid in massive stocks prior to the Olympics in the expectation of supply disruptions on their return only to have the market promptly collapse and with it finished steel prices. The Chinese mills have been producing steel in a falling market with raw material priced at a historic high.
The China Iron and Steel Industry is urging the steel producers to play hardball in the current iron ore contract negotiations with Vale, BHP and Rio. The majors want the mills to accept an index pricing formula so that iron ore prices will increase as steel prices recover later in the year. CISA is urging the mills not to accept this arrangement and instead to work hard for the lowest possible fixed price ” they clearly do not want to see rising iron ore prices again later in the year but rather want the mills to rebuild their profitability by controlling costs as steel prices rise.
In the long run, China’s move up the value chain will only mean more competition for western steel producers. But in the meantime, their success in stabilizing prices by cutting capacity should give heart to the western mills who are currently operating on 40-50% capacity rates.Ã‚Â Eventually, when de-stocking is complete and demand picks up a little, soÃ‚Â may prices.