Nov.21 MetalBiz—China recently take out a series of policies to stimulate domestic demand such as the 4trl-yuan investment program issued by the State Council, which dragged down the plunging trend of domestic steel prices. Some small and medium steel enterprises have restored production already. Experts held that the substantial recovery will be in next February or March.

Michael E. Feroli, US economist of JP Morgan denoted at an interview that the 4-trillion investment project will promote Chinese economy significantly, and the economic growth speed is expected to show double-digit recover in next year.

He held that the worst period of this financial crisis had been over as recently nations all over the world had taken out significant actions to stabilize the market and stimulate the economy. However, he added that the current concern had turned to real economy. The global economy has been in recession to some extent.

“The high furnaces that formerly closed started production again as the governmental investment will take effect and I believe that the market will recover like the furnaces.” an insider from a steel enterprise in Tangshan, Hebei province denoted. At present, many steel enterprises are considering about next production and sales step. Relevant experts held that the series of governmental stimulating policies will promote domestic steel demand, but it will not take effect until February and March of 2009. Currently, steel enterprises and downstream enterprises are still under pressure for great inventory.

It is learned that recently medium and small steel enterprises in Hebei and Henan province restored production gradually. After the mid-November, prices of domestic construction steel stopped plunging basically. For example, the price of 5.5*1500mm HR coil had reached 3,250 Yuan per ton and 3,180 Yuan per ton in Shanghai and Tianjin respectively, up 430 Yuan per ton and 330 Yuan per ton separately. Meanwhile, market price of iron ore increased 20-30 Yuan per ton generally after two months’ decline.

These stimulating policies are undoubtedly quite favorable for the drastic plunging steel market. Although the 4-trillion investment program and export tax cancellation had not show effect clearly, the market mood turned better significantly.

In addition, Yang Zhongming, director of Planning Department of the Ministry of Railway expressed recently that the investment on railway fundamental construction is planned to complete 300 billion Yuan this year, while according to the current situation, they will tried to complete extra 50 billion Yuan and the investment of next year is planned to finish 600 billion Yuan. Jiangsu province and Hebei province also announced positive policies to stimulate local demand, with the focus on the construction of railway, highway, airport and waterway transport, etc..

However, experts pointed that domestic steel market remained not so optimistic within this year as the inventory maintained high. Statistic data showed that the inventory in real estate industry, whose consumption accounted 25pc of the steel demand, had increased 112.513 billion Yuan. Insiders from Chengdu Wanke Real Estate Co., Ltd. told that the its current inventory could sustain 22 months even if there was no new projects. Poly Real Estate Group Co., Ltd. also expressed that its current inventory could sustain 36 months.

Large amount of inventory constrained the demand for steel products, while inventory in most steel enterprises hit the new high as well. At present, the inventory in quite a number of listed steel enterprises accounted for over 30pc of its total assets. Public data showed that the inventory in Nangang and Guanggang accounted for over 40pc of the total assets, while the inventory in WISCO reached 800,000 tons and the inventory value in Baosteel realized 52.14 billion Yuan.

The iron ore supply still exceeded that of the demand, with the port inventory over 90 million tons, which could sustain three months’ production for all domestic steel enterprises. Statistic data showed that in Jan.-Oct., primary ore needed by pig iron production was around 624,091,110 tons, while the iron ore resources in China were about 675,000,000 tons. Therefore, the oversupply realized 50,908,900 tons.

Nov.20 MetalBiz—China Iron and Steel Association (CISA) yesterday published a report announced that recently the government laid down a series of beneficial measures, however, as international financial crisis made bigger influences on real economy and macro economic environment still faced many uncertain factors, steelmills should make full mental preparations for a long-term fight, take effective measures, and actively cope with varieties challenges.

Data from the report displayed that domestic steel products market still faced pressures from consumption growth slowdown and poor demand, as well as the anabatic market panic emotion, so prices appeared a sharp slumping situation. At the end of October, the composite index of domestic steel price was 108.59, down 35.35pc month-on-month, a reduction of 24.56pc, the biggest monthly fall since 2001.

Among them, both long products and plate products drastically sink. At the end of October, the price index of long products touched 110.47, a slump of 33.21pc from September, down 23.11pc, while that of plate products amounted to 106.74pc, down 37.24pc month-on-month, a decline of 25.86pc, simultaneously, the decline range of long products and plate products respectively boomed 18.56pc and 19.96pc when compared to September.
 
The report thought U.S. financial crisis gradually produced influences on domestic real economy, market confidence encounter serious block, economy growth slowed down, steel production growth dropped, steel products export presented a downward trend, thus resulted in excessive market panic and nonstandard competitive order, eventually lead to the extensive drop of domestic steel products prices.
 
Additionally, affected by the notable decline of steel products prices, the price of raw material for steel production also presents a sharp rebound tendency, for example, in comparison to the end of September, prices of domestic iron ore concentrate, steel scrap and coke all decline more than 30pc monthly, thus the supporting effect of steel price from production cost also starts tumbling.

However, the future development situation of steel industry also welcomes some positive factors; for example, the government has laid down a series policies of expanding domestic demand, which will drive domestic steel products requirement. The export tax adjustment is benefit for steel enterprises to get more profit and release market pressure. Meanwhile, the lower level social inventory is favorable to the gradual stabilization of latter steel products prices.
 
With respect to the next work, the report required steelmills to insist on production in accordance with market demand, and adjust product structure in accordance with consumptive structure changes, endeavor to realize the basic balance of demand and supply.

Nov.19 MetalBiz--The State Council Standing Committee Conference decided to cancel part of steel products’ export tax on Nov.12. Although specific details have not come out, the initial analysis can be seen as follows.

Export tax cancelation will stimulate domestic steel industry, but far from enough.

The cancelation of part of steel products’ export tax will stimulate domestic export demand to certain extent, but it is also far from enough and can not change the decreased current situation at home and abroad, because the demand from global market is still sluggish, and the continuous policies of expanding the domestic demand are benefit for downstream requirement restoration, but the effects still need to be observed.

According to the data from Customs, China exported 4.62mln tons steel products in October, dropped 2.05mln tons and 30.73pc when compared to the pervious month, and the net steel export of China in October was only 3.78mln tons in accordance with steel products and steel billet discount to crude steel, down 2.15mln tons and 30.73pc month-on-month, which better reflected the poor demand situation currently in international market.

We still have no confidence of steel products requirement’s rapid recovery, part steel products’ export tax cancelation is helpful for exported products to increase the profit space in short term, stimulate steelmills’ export enthusiasm and keep steel market stable, however, these measures can not change the poor situation, under the background of international financial crisis, time is also needed for global market restoration. We believe that the export tax cancelation will rapidly produce influences on steel products prices at home and abroad and also gradually curtail the irritant effects. At the same time, under the situation of poor steel requirement at home and abroad, the policy will prick up the trade attritions between China and other countries and regions.

Six benefits brought by export tax adjustment to domestic steelmills.

Export tax adjustment will bring six benefits to Chinese steel enterprises. We can see the advantages in the following.

Firstly, the frequent adjustment times this year set the new historic record. After implementing the export tax cancelation policy on Dec.1, Chinese government has adjusted the export tax rebate for three times this year. According to media survey, the policy is characterized by enterprises’ profits growth and the price advantage participating in the market competition to some extent. Insiders warned the small and medium-sized steelmills, who had export business, would earn the profit from export tax rebate as possible, but not earn by foreign traders.

Secondly, the policy explicitly supports labor-intensive enterprise. Government still hold cautious attitude towards export tax rebate, the export structure regulation still exists in the adjustment. Previously, with respect to the export tax rebate of labor-intensive products, especially high-energy consumption, high-pollution and resources products, the government still seriously controls. Therefore, this policy adjustment will drive the labor-intensive products’ export.

Then, Ansteel will get the largest benefit. In the listed companies, the export rate of Anshan Iron and Steel Corporation (Ansteel) is the highest. In 2007, Ansteel exported 3.14mln tons products, accounted for 20.8pc of the total output, and it had exported 1.2mln tons in H1, 15.63pc of the total production.
 
In addition, enterprises whose have higher pipe products’ export rate will get largest benefit. Viewing from concrete varieties, the export tax of hot-rolled coil and plate, special heavy plate, heavy steel plate and medium plate is mostly 5pc, and that of large section steel is 10pc, and that of cold-rolled narrow steel strip, tinplate and steel pipe is 15pc. In calculation with that steel products decline 20pc and export price drop 10pc in 2009, the profit influence of steel industry is around 11bln yuan. As pipe products export is the most and the adjusted range is the highest, so enterprises whose have higher pipe products’ export rate will get largest benefit.

Moreover, the policy is favorable to large state-owned enterprises. At present, China imposes 10-15pc export tax on long steel products and 5pc on hot-rolled steel. The government may incline to large state-owned enterprises, because they can export more flat steel products in comparison to small steelmills, which means that Chinese hot-rolled steel export cost will slump $26 per ton on the foundation of the current spot price of $510 per ton.

Finally, the policy is benefit for plate products manufacturers. As the high-added value products, the actual price of plate products in domestic market has been lower than low-grade products, such as construction steel products. However, domestic large and medium steelmills focus on plate products, so the operation situation is very poor.

Nov.18 MetalBiz—Executive meetings of State Council announced on Nov.12 that they will raise export rebate rate of commodities since Dec.1 once again and make some adjustments on export tax of some products, including cancel the export tax for some steel products. As for this, insiders believed this move has limited impact on China’s steel industry and it is difficult to turn the current sluggish market better. The researchers believed it will have some positive impact on China’s steel export market.

Helpful to restore confidence in market

China’s steel price witnessed the unprecedented decline with fast speed since June and most of steel enterprises gained losses and some small and medium enterprises closed or bankrupted in Sept. At present, steel price is in adjustment for some time and the steel price trend was unclear later. Under this crucial moment, the state announced the steel export tax adjustment policy, which is very helpful to raise the confidence in market and stabilize the steel price. At least, the tax adjustment this time will boost the steel export in a certain point and ease the pressure for China’s steel market.

The state will also improve the export rebate tax for labor-intensive products and mechanical and electrical products as well as other products since Dec.1 this year. The adjustment will involve 3770 items, accounting 27.9 percent among the total export. It will ease the downstream industry’s export pressure and promote the indirect steel export; therefore, the time for steel industry to get out of the sluggish situation is expected to shorten greatly.

In addition, a series of policies recently to stimulate economy issued will raise the confidence from investors and the stock market restoring will release the consumption to promote the downstream industry to restore.

Favorable to steel industry indirectly

Obviously, export tax rebate rising of commodities and export tax adjustment down of some products will helpful to decline steel export costs. Set hot-rolled plate coil as an example, the cancellation of 5 percent tax will decline export cost for $25 per ton. Domestic steel enterprises will turn to export actively under this current sluggish domestic market. The tax adjustment this time will provide support for China’s steel export and decrease the export costs, and the cost decrease for each month is expected to reach over 300 million Yuan.

Helpful to maintain high international price differences

Seeing from the international price differences, it declined in Nov than that of in Oct. International price difference of hot-rolled plate coils in Nov in other areas except of South Korea, Japan, Latin America and Commonwealth of Independent States, declined greatly than that of in Oct due to the constant economic worsening in Europe and USA. Therefore, the tax adjustment this time is helpful to maintain the price advantage for China’s steel products in the international market.

Later steel export may maintain above 4 million tons

International steel demand declined sharply due to the subprime crisis and orders of domestic steel enterprises in Oct declined greatly too. But insiders suggested that the market should not worry much because it is the price that affected the demand. They claimed if the state can export with lower price, they will gain profit in a certain point. At present, the export price of China’s steel products has great space to adjust down. For example, the price difference between China and US on Nov.12 was $327, as for this, China can offer less than $100 for exporting, which is lower than that of US, therefore, China can grasp more shares in the market. But the disadvantage of this move is likely to bring anti-dumping and anti-subsidy, steel enterprises should choose the market cautiously. Insiders believed China’s steel export is likely to maintain above 4 million tons in the next few months stimulated by the international price differences.

Views on current export tax adjustment