Analysis of Development Trend of Steel Market in 2013

As the major economic indicators stabilize, the darkest days for China's steel market seem to be behind us, with a modest uptick expected in 2013. Domestic demand appears stronger than external demand, with currency fluctuations playing a significant role in pushing prices upwards. However, uncertainties like the European and American debt crises make the recovery process anything but smooth. Firstly, the worst of the demand slump has passed. In 2012, key indicators reflecting steel consumption, such as fixed asset investment and industrial production growth, contracted, leaving China's steel demand weak. To avoid an economic hard landing, authorities introduced measures to boost domestic demand, particularly accelerating project approvals. By early September, the National Development and Reform Commission had approved investments totaling over 5 trillion yuan. In October alone, railway infrastructure investment hit 69.8 billion yuan, a 2.4-fold increase year-on-year. It's anticipated that 2013’s railway infrastructure spending could surpass 500 billion yuan, far exceeding this year's levels. Consequently, China's economy, including steel demand, bottomed out and stabilized in Q4. October’s Purchasing Managers' Index (PMI) came in at 50.2, marking two consecutive monthly gains above the critical line. Fixed asset investment, industrial output, and export trade all saw a comprehensive recovery in September and October. Steel prices and production also began to recover sequentially, signaling that the worst phase of steel demand has passed. With the gradual impact of expansionary policies, China's steel demand is expected to grow moderately in 2013, with total crude steel consumption (including exports) potentially reaching 750 million tons, a rise of over 5% compared to last year. Infrastructure investment, along with the production of associated machinery and equipment, is the primary driver of increased steel demand. Many approved projects focus on transportation, particularly urban rail and high-speed rail, which have high steel consumption rates and require substantial mechanical equipment and material flows, bolstering demand. Looking at specific product categories, construction steel, railway steel, machinery steel, automotive steel, and specialty steel are expected to see significant demand growth. From a timeline perspective, most projects were approved between June and August. With a typical six-month preparation lag, these projects will begin reflecting their steel demand starting from early spring 2013. In the new year, despite challenges such as the Eurozone crisis, the U.S. fiscal cliff, and tensions in China-Japan relations, external demand remains weak while domestic demand strengthens. Steel exports are projected to reach around 55 million tons, with a slower growth rate compared to last year and possibly even a slight decline. Indirect exports, such as automobiles, ships, machinery, and household appliances, are expected to perform even worse. Secondly, domestic steel production slowed significantly in 2012 due to weak demand, contributing to oversupply issues. From January to October, China’s crude steel production grew by just 2.1% year-on-year. Annual growth is expected to hover around 3%, considerably lower than the average of approximately 10% in recent years. The recovery of steel demand in 2013 will inevitably lead to increased domestic production. Crude steel output is forecast to reach or exceed 750 million tons, growing by more than 4%, higher than 2012’s pace. While production of rails and plates may decline, steel bars, wire rods, and steel pipes are likely to grow at a faster rate. Hot-rolled steel sheet production might decrease. Accelerated domestic crude steel output, coupled with low iron ore prices and shrinking domestic mining, will boost demand for imported iron ore. Annual imports are expected to reach or exceed 800 million tons, increasing by over 5%. Thirdly, multiple factors are setting the stage for price increases. Weak steel demand in 2012 led to price shocks, but stabilization of economic indicators has improved the supply-demand balance, laying the groundwork for recovery. Raw material prices like iron ore and coke fell sharply in 2012, with drops of over 30%, weakening cost support. However, since September 2012, iron ore and coke prices have rebounded, with imported ore CIF rising by 30%. This suggests that the cost floor for steel prices will rise in the future. Steel traders seem reluctant to engage in large-scale "winter storage" this year. If true, this will limit steel production during winter, benefiting the supply-demand balance post-spring. Importantly, developed nations like the U.S., Europe, and Japan have adopted ultra-loose monetary policies, increasing liquidity and weakening the U.S. dollar. This has pushed up international bulk commodity prices, including steel, iron ore, and coking coal. Particularly noteworthy is the impact of the Federal Reserve’s “QE3,” which, despite limited benefits for U.S. recovery, could trigger inflows of foreign capital into China due to large interest rate differentials and low domestic asset prices. This influx could directly and indirectly drive up Chinese commodity and asset prices. Recently, the *** exchange rate has appreciated, showing signs of daily limit adjustments. While this reduces import costs somewhat, it cannot fully counteract the upward pressure on steel and related product prices caused by speculative capital inflows. The combined effect of these factors will likely result in a gradual upward trend in China’s steel prices in 2013. Steel product prices are expected to be higher than this year, with construction steel prices rising more sharply than flat steel. Assuming no second global recession, the Shanghai Rebar ** contract price may reach 3,800 to 4,000 yuan. The price of iron ore, especially imported high-grade ore, will continue to recover, with CIF prices reaching or exceeding $130 in Q1 2013 and averaging above $120 annually. Despite a rebound in the Chinese steel market in 2013, domestic and international uncertainties make the recovery path challenging, marked by significant price fluctuations. Domestically, the presence of excess capacity and cutthroat competition pose risks. Once prices rise, steel companies are likely to ramp up production, disrupting supply-demand equilibrium and driving prices back down, leading to losses. Externally, the ongoing Eurozone debt crisis, the U.S. budget crisis, and prolonged Sino-Japanese disputes could delay recovery, raising concerns of a double-dip recession. These uncertainties introduce volatility to raw material prices, with adjustments occurring frequently. Yet, even with these challenges, the worst of the steel market seems to be over. Prices are unlikely to return to last year’s lows, and the overall upward trend remains intact. However, without careful management, the market faces risks of further instability.