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High inventories in the steel industry have not changed

Time: Sep 23, 2020 Views: 0

Affected by the epidemic, the steel industry, growing rapidly for three consecutive years, has fallen into a trough, encountering a series of problems such as blocked exports, declining demand, high inventory, and falling prices.

He Wenbo, Secretary of the Party Committee of the China Iron and Steel Association, said recently that the epidemic has had a greater impact on steel demand. Judging from the indicators of the main steel industry in the first quarter released by the Statistics Bureau, the decline in demand has been obvious.

Specifically, in the first quarter, there was a significant decline in demand from many large steel-using industries. Among them, the newly started area of real estate decreased by 27.2% year-on-year, infrastructure construction investment (excluding electricity, heat, gas and water production and supply industries) decreased by 19.7% year-on-year, automobile production decreased by 45.2% year-on-year, and shipbuilding completed decreased by 27.3% year-on-year.

Steel exports are also facing greater pressure. He Wenbo said that due to the impact of the epidemic, foreign steel demand has fallen sharply, and the number of new orders received by major exporters in March and April has dropped significantly from the previous month. Since the end of March, it has been common for overseas orders to postpone delivery, and there have also been some requests to reduce the number of orders or even orders cancel.

High inventories in the steel industry have not changed

In addition, affected by the epidemic, China's mechanical and electrical products, which are the main export force, have also seen a decline in export orders or even destruction of orders. Therefore, the demand for steel in the manufacturing industry is expected to decrease. He Wenbo said that if both direct and indirect exports of steel fell by a quarter, steel demand would fall by 3.8% this year. If the international epidemic situation worsens, the decline in steel demand will be even greater; if domestic demand expands to offset the decline in exports, the decline in steel demand will shrink.

Affected by the decline in demand, a number of typical indicators such as steel prices and profits have dropped significantly. In the first quarter, the China Steel Price Index (CSPI) monitored by the China Steel Association averaged 101.69 points, down 5.7% year-on-year. From the perspective of the monthly situation, the steel price showed a trend of continued slight decline. The Chinese steel price index was 105.48 points at the end of January, 100.39 points at the end of February, and 99.21 points at the end of March.

"Demand has fallen, supply has remained stable, and the supply of steel in the steel market has exceeded demand, resulting in a downward trend in steel prices." He Wenbo said that the downward trend in steel prices has not slowed down. As of the second week of April, China's steel price index fell to 96.86 points, became the lowest point since May 2017.

In terms of inventory, although the current steel inventory has shown a downward trend, the overall situation of high inventory remains unchanged. In late April, the social stocks of five major types of steel in 20 cities were 16.24 million tons, a decrease from the previous ten days, but still an increase of 9.43 million tons from the beginning of the year.

Luo Tiejun, vice chairman of the China Iron and Steel Association, said that according to the current production pace of steel mills and the overseas epidemic will have an adverse impact on direct and indirect steel exports, high inventories may become the norm in the steel market this year.

It is worth mentioning that due to the impact of falling prices, the profits of steel companies have fallen. In the first quarter, the key statistics of the Steel Association’s member companies’ sales revenue was 891.6 billion yuan, down 5.6% year-on-year; total profits were 18.3 billion yuan, down 50.8% year-on-year; sales profit margin was 2.05%, down 1.89 percentage points year-on-year.

In addition, the divergence of imported iron ore prices and steel prices has also put greater pressure on steel companies of reduce costs and increase efficiency. Data show that the average import price of iron ore in my country in the first quarter was US$90.59/ton, up 11.7% year-on-year, while steel prices fell 5.7% year-on-year.

Industry insiders said that it is no longer a serious overcapacity in the original sense, but a phased dislocation between output and actual consumption. We should take special precautions against the risks of phased capacity release and actual consumption recovery that are not as expected, speed up mergers and reorganizations, and prevent blindly building new steel capacity.

Dong Caiping, chairman of the All-Union Metallurgical Chamber of Commerce and president of Zhongtian Iron and Steel Group, said that due to the impact of the epidemic, it will take time for the upstream and downstream supply chains to recover. Market demand is insufficient, and social and corporate inventories are rising. Enterprises need to have a clear understanding of the development situation in the next stage, attach great importance to their own financial security, invest carefully, and avoid blindly expanding production capacity.

He Wenbo pointed out that resource guarantee, production capacity layout, and concentration are the three shortcomings of China's steel industry. Promoting mergers and acquisitions and increasing industrial concentration are one of the important development strategies of China's steel industry. Increased industrial concentration is conducive to collaborative cooperation among steel companies in the areas of resource control, orderly market competition, technological R&D innovation, energy conservation, consumption reduction, and emission reduction, so as to optimize the allocation of talent, technology, capital, and data. In the next step, the pace of mergers and reorganizations should be accelerated, market-oriented operation methods should be adhered to, the number of enterprises should be effectively reduced, the reduction of steel production capacity should be optimized, and the effective supply level should be improved.

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