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Wu Wenzhang: Lofty Production, High Inventory and Low Price Level in 2010
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Wu Wenzhang: Lofty Production, High Inventory and Low Price Level in 2010

[SteelHome] 2009-11-03 14:39:18
Wu Wenzhang, President of SteelHome website, addressed at SteelHome 2010 Steel Market Outlook Seminar on October 31-November 1, 2009.
Crude steel demand in China would amount to 580-600 million tonnes in 2010, up 10%-12% year on year.
Apparent consumption of crude steel in China is expected to 570 million tonnes in 2009, up 26.7% compared with 450 million tonnes of 2008. Actually, real consumption in 2008 was 460 million tonnes, taking inventory liquidation in Q4 into consideration.
The consumption of crude steel in 2009 would attain 545 million tonnes, however, the real consumption may be 530 million tonnes making allowance for inventory liquidation, up 70 million tonnes over 2008.
The surge of steel consumption in 2009 is attributable to government’s stimulus policies of expanding fix-asset investment. The large proportion of FAI in GDP will not change in China in 2010.
We estimate China crude steel demand would rise 10%-12% year on year to 580-600 million tonnes in 2010 according to GDP, crude steel consumption per 100 million RMB of FAI in recent years.
China steel exports would improve in 2010, and net exports of crude steel may attain 20 million tonnes.
It is steel demand in global markets that determine China steel exports, not price spread between China and global market and adjustment of China ’s trade policies.
Factors that dent China steel exports in 2010: a) global steel demand grows slowly. According to figures from World Steel Association (WSA), global crude steel consumption in 2010 is 145 million tonnes lower than 2007 production. b) major steel-making countries witness overcapacity. China is confronting severe challenge from those steel exporting countries.
Factors that may drive up China steel exports in 2010: a) international steel demand would recover in line with strengthening world economy b) major export destinations of China steel are Asia, Middle East and Africa . Economies in those regions are advancing rapidly, which would help stimulating China steel exports.
As China crude steel production may be 600-620 million tonnes in 2010, the supply/demand may reach equilibrium without considering inventory. However, if Chinese steel mills have no intention of production cutbacks right now, apparent consumption in 2009 would amount to 570 million tonnes, which would trigger oversupply of 25 million tonnes.
Contracted ore price may maintain stable for 2010.
The contract price of imported ore for 2010 may stay flat or rise within 10% compared with 2009 price reached by Japan and S Korea .
First, current raw material supply is sufficient for 620 million tonnes of crude steel production. If China iron ore imports of 2010 sustain at the estimated level of 620 million tonnes of 2009, plus China domestic capacity of iron ore, coke and scrap reserve, all the raw material supply can be sufficient for 670 million tonnes of crude steel production in 2010.
Second, globally overcapacity of iron ore. The export capacity of iron ore attain 1.06 billion tonnes, exceeding real exports in 2007 and 2008.
Third, global steel mills see sliding profit in 2009, so they would not accept great rise in metallics price.
Fourth, low price of imported ore has already dented the capacity unleash of domestic iron ore, therefore, there is also slim chance for imported ore price to plummet.
Fifth, anticipated inflation resulted from devaluing US dollar, oil price hike will shore up imported ore price.
Lofty production, high inventory and low price level: basic features of China steel market in 2010.
Chinese steel mills have no intention to cut back production right now. Large steel mills have advantages in raw material purchase, and small mills get edges on operation cost. Therefore, China steel production would maintain high in 2010.
Ample liquidity and low steel level provide good opportunity to replenish inventory. Part of inventory is locked to financing, guaranteed, and pledged. With increasing activities of steel futures in China , steel inventory that locked in futures trading is rising.
China steel price will linger around average operating cost in 2010. The balance of supply and demand will only be adjusted by price level.
Ample liquidity shore up current steel price
Three factors are working together to push up steel price in middle October. a) end users begin to replenish inventory after two months’ continuous decline of steel price. b) Some distributors have the guts to hoard goods in anticipation of price hike due to easy accessibility to bank loans. c) Devaluing US dollar and commodity price spike strengthen the anticipation of inflation.
The money supply will remain fluent till the early of 2010. a) treasury’s intensive payment will be in the fourth quarter. The fiscal expenditure in the 4th quarter will reach 3.1 trillion RMB, far higher than average level of 1.6 trillion RMB in Q2, and Q3. b) financial institutes will not tighten credit loans in the first half year, so money supply would remain ample in Q1, 2010. c) China’s high growing economy attracts the inflow of foreign investments.
China crude steel consumption in Q3 remain flat with that in Q2 according to the performance of downstream sectors and major economic indices.
China steel market will focus on inventory liquidation in H1, 2010. A round of price hike may occur around May, 2010. The whole industry of 2010 will be stronger than that of 2009.

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