Chinese steel advances in adversity

——Interview with Liu Weimin, Research Associate, Institute of Market Economy, Development Research Center of the State Council

At present, due to the reduction of demand for steel products in large industries such as real estate, automobiles, and high-speed rail, the overall steel market in China is somewhat sluggish compared to previous years. Many steel companies are facing losses. Although they are losing money, they are all supporting. What is the root cause of this situation? The Ministry of Transport and the Ministry of Transport have imposed restrictions on the use of large ships with a capacity of over 400,000 tons to stop at the port, and what is the impact on China's steel industry? The price index of the China Steel Association has been introduced. About five months or so, how is it operating? For these issues, the China Economic Times reporter interviewed Liu Weimin, associate researcher of the Market Economy Research Institute of the Development Research Center of the State Council and deputy director of the Market Circulation Research Office.

At present, the main contradiction faced by China's steel industry is still the contradiction of oversupply. As China enters into a critical period of development, the transformation and upgrading of the steel industry will inevitably become more and more urgent. Production must be strategic, requiring companies to consider the entire operating cycle rather than just making a point.

China Economic Times: In recent days, the price of iron ore has fallen from 180 US dollars per ton to about 130 US dollars per ton today. Under such a large decline, it has been reported that 95% of the current steel is in a loss state. Loss, but there are few production cuts, and even some steel companies executives say that a loss of 100 million in production does not produce a loss of 200 million. What do you think is the reason why China's steel industry is facing such a dilemma? What are the basic reasons?

Liu Weimin: At present, China's iron and steel industry is indeed a meager profit. There is no high profit margin in previous years, and even some companies that are not competitive are losing money. The reason I think is mainly the following two points:

First, from the perspective of the fundamentals of the industry, the main contradiction faced by China's steel industry is still the contradiction of supply exceeding demand. Many manufacturers have to produce at a lower marginal profit margin. The rapid expansion of steel production capacity in previous years was an objective requirement for the rapid development of China's industrialization and urbanization. It also provided strong support for the sustained and rapid growth of China’s national economy in recent years. However, China’s entry into the economic structure has gradually entered a critical period of the transition of development methods. The new stage of optimization and slowdown in scale will inevitably have an impact on the existing huge steel production capacity. Some companies with relatively weak market capacity will increasingly feel the pressure, and the transformation and upgrading of the steel industry will become more and more urgent. .

Secondly, from the perspective of short-term market factors, the so-called "loss is also production" is actually a strategic choice for iron and steel companies. Some companies expect that iron ore will be in a correction phase for some time to come. Therefore, some companies hope to digest the early stocks of raw materials such as iron ore as soon as possible, quickly return funds, and then purchase raw materials such as iron ore with lower prices. To achieve the purpose of making up for future losses with future earnings, this is also one of the reasons for the low-cost shipments of a large number of companies in the previous phase. This is the case with production organizations, which must be considered from the overall operating cycle, and trade-offs are made when necessary.

The document issued by the Ministry of Transport is actually a re-enforcement of the 2006 notification. Different stakeholders will have different positions and their interpretation will be different.

China Economic Times: On January 31st, the Ministry of Transport issued the Notice on Adjusting the Over-design Regulation of the Vessels' Vessels' Vessels, noting that since the date of promulgation, it has exceeded the current specifications for the design of large-scale dry bulk and oil ships. The berthing management is no longer adopted in the “one boat, one discussion” method, but the “argument-review-approval” procedure must be strictly implemented. This means that, from now on, Vale’s 400,000-ton ships will stop at China’s ports and face strict management, which will cause their “wheel plan” to run aground. How do you view this incident and what impact will it have on China's iron ore imports?

Liu Weimin: From the perspective of industry supervision, this notice is mainly directed at the safety of large-scale ship operations. The port is not capable of accommodating more than 400,000 tons of giant ships, and it is imperative that nets be allowed to enter, and that in the long run, hidden dangers to safety will be irresponsible. The document issued by the Ministry of Transport this time has no more new content than the 2006 Notice on Strengthening the Verification and Management of Port Terminals' Berthing Capacity. This is actually a re-enforcement of the 2006 notification. It will also play an active role in the long-term development and standardized management of China's ports.

From a worldwide point of view, as the world economy slows down, the demand in the steel market weakens, international iron ore suppliers have strong monopoly power, and ore prices remain at historically high levels. The iron ore industry chain Stakeholders respond differently to this policy. For international ore companies, they have to face more stringent technical supervision. Vale postpones the “big wheel plan” or adopts other alternatives. In the short term, it is not conducive to reducing the cost of shipping iron ore in Brazil. Of course, this policy is undoubtedly a good news for a domestic shipping company that is in a competitive relationship. It is a bigger and stronger market opportunity. The domestic steel companies hope not only that the price of imported iron ore will be reduced, but they also do not want to see the monopoly status raised by the vertical integration of international miners and increase the difficulty in negotiating the future price of ore.

The China Iron and Steel Association iron ore price index is based on the actual contract price, with stability, and its amplitude changes little. The other several common iron ore indexes are based on inquiry data and the amplitude of change is relatively large.

China Economic Times: You once said that the real significance of setting up an iron ore price index is not to influence prices, but to better reflect the real situation and trend of the market. The price index of China Steel Association released nearly five months ago, please Have you taken a look at the performance of the China Steel Association's version of the price index in these five months?

Liu Weimin: China Iron and Steel Association iron ore price index has achieved good results in the industry since it was launched for five months. Compared with other indexes such as the Platts index, the biggest difference is based on the actual contract price. This is also the biggest highlight of the China Steel Association index. From the operation of a few months, it basically reflects the price trend of iron ore. The monitoring process of these indices also found that the China Iron and Steel Association index was smaller than other indices, that is, there was no large change in other indices. This is because the China Steel Association index is based on transaction contracts, and the commercial relationship behind many contracts. Because of its stability and long-term nature, China Iron and Steel Association has a small ore price swing. While several other common iron ore indexes are based on inquiry data, the market is expected to have greater impact on quotations.

In 2011, the growth rate of steel production in general showed a trend of rising from high to low, and prices of the year also rose first and then fell. Affected by various factors, the recent domestic steel production growth rate will continue to maintain a relatively low level, and market prices will be dominated by low-level fluctuations.

China Economic Times: Please take a look at the overall situation of China's steel industry in 2011 and make some predictions for 2012.

Liu Weimin: From a production perspective, the growth rate of steel production in 2011 was generally high and low. In November, the daily output of crude steel once fell to 1.663 million tons, which was the lowest point in 13 months. In the whole year, China produced a total of 683 million tons of crude steel, an increase of 8.89% year-on-year, and a year-on-year growth of 1.8 percentage points over the previous three quarters.

From the price point of view, the price of the whole year also showed a trend of rising first, then falling, and oscillating at a low level. At the end of 2011, the China National Iron and Steel Association's comprehensive steel price index was 120.45 points, a year-on-year decrease of 6.1%. Affected by the decline in demand, iron ore prices also fell significantly. In December, the average cif price of imported iron ore in China was US$141.24/ton, which fell for the third consecutive month, making the cost rigidity of steel prices weaken.

Judging from the recent trend of the domestic steel market, the keynote for China’s economic development this year is “stabilizing and seeking progress.” The downstream steel demand will maintain a certain growth rate, but the division of various industries will be even more serious. The uncertainties in the growth of some industries such as real estate, high-speed railways, and automobiles still exist. Under the influence of weak international demand, appreciation of ***, and increased trade frictions in steel, steel exports will not increase substantially. Therefore, the recent domestic steel production growth rate will continue to maintain a relatively low level, and market prices will be dominated by low-level volatility.