Insight
Steel price recovery no hindrance to overcapacity cut
Last Updated: 2016-11-14 10:56 | CE.cn
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By Xu Hongzhou

The steel industry enjoys extremely strong performance in recent periods. In addition to the rising steel price, the news as the recombination of Baosteel Group Corporation and Wuhan Iron and Steel (Group) Corp., share bidding and outperform of Shougang Group, fund reservation for transformation development of Wuhan Iron and Steel (Group) Corp., etc. boosts people's spirit. Why does the steel price rise? Why does the market play an active role? Whether the iron and steel industry will get better? Is there any influence to capacity reduction from the rising steel price? Further analysis should be carried out against this.

Supply and demand improving and market heating up

The domestic steel price has risen rapidly since October. Dominant contract price of deformed steel bar futures has risen nearly 8 percent accumulatively. As it were, "silver October" of the steel market has been confirmed basically. The raising of steel price in this period is originally derived from the comprehensive breaking out of black commodities. The price of coking coal and coke has risen for about 30 percent in recent one month due to supply shortage. This resulted in lower inventory of coking coal in steel mill and independent coking plant. While the price of the ore and billet steel has risen at the same time, therefore, the steel mill suffered from cost stress. Under the situation of cost sharply rising, some steel mills reinforced output reduction and overhaul efforts, and transferred the stress by raising ex-factory price greatly, forming an obvious impact to steel price up trend at home.

From the view of demand side, downstream industries of steel industry all performed well. The fulfilled amount of investment of real estate has a year-on-year growth of 5.75 percent from July to August and a growth on moving basis of 2.29 percentage points compared with that in June. The production and operation of manufacturing industries like engineering machinery, automobile and household appliances tended to be more active, resulting in more demand for steel; The investment of infrastructure construction has been kept at relatively higher level. The steadily increasing demand resulted in the social inventory declining of steel that accumulated continuously in earlier stage. The pressure on inventory and supply has been remitted and the supply and demand pattern in a short period has been improved. The market is in tighter equilibrium, thus to support the price rising.

Therefore the steel price at home has been kept at a higher level in the recent period under the push of cost and the support of demand. The main power for improving supply and demand pattern is derived from the national macro control on iron and steel industry. "As the implementation of macro policies of stabilizing growth, promoting supply side structural reform and resolving surplus capacity since 2016, the steel demand has relatively stable and the market expectation has enhanced gradually," expressed Qu Xiuli, vice president of China Iron and Steel Association.

Due to serious overcapacity and along with China’s economy entering into new normal, the development environment of iron and steel industry has changed deeply. The consumption of iron and steel has reached its peak value and appeared a trend of declining and the product price has depreciated continuously. The iron and steel enterprise operates from meager profit to loss in main business making the whole industry has entered into "severe winter". Under such circumstances, the central government has put forward to promoting supply side structural reform and has issued a series of policies and measures intensively for the purpose of guiding capacity reducing in iron and steel industry actively.

The iron and steel industry has reached an interior consensus through the promotion for over a half year. Liu Zhenjiang, secretary of the party committee and secretary-general of China Iron and Steel Association, considers that iron and steel industry in China is more rational than the past. The enterprise has stronger capacity in studying, judging and rapid reacting to the market than the past and has rational control of the production and inventory. The enterprise should handle the price dispassionately, stabilize the price actively and reduce vicious depreciation. These factors are the reason of better benefit in iron and steel enterprise which also bring more passion into the iron and steel market.

Starting recombination to reduce capacity firmly

Although the steel price rises, generally speaking, it is the rebound against the low price in the early stage and belonging to rational return. In addition, there is no lack of promotion of venture capital; Although the market supply and demand has been improved in short period, there are still variables in market trend of the next stage along with tighten effect of real estate policy gradually appeared and overdraft of partial demand in the early stage. Meanwhile, although the performance of enterprises in the industry has improved, these are all derived from the over-low cardinal number on year-on-year basis and obvious differentiation of enterprises.

Based on comprehensive analysis, the basic situation of oversupply and surplus capacity of the iron and steel industry has not been changed. Problems as over low concentration ratio and high operation pressure of enterprises have not been solved yet. According to data, the crude steel yield in China's iron and steel industry in 2015 was 804 million tons, accounting for 49.5 percent of the world total output, while the capacity using efficiency was merely 67 percent. The market share of the top ten enterprises in China's iron and steel industry in 2015 declined to 34.2 percent and the industrial concentration dropped to the lowest point in recent ten years.

Zhu Jimin, standing vice president of China Iron and Steel Association, considers that iron and steel industry in China has entered into the stage of structural optimization from scale expansion and entered into a new stage of green, reduced, intellectual and international. The production and consumption of steel product shall fluctuate, but it has accessed descending channel as a whole. The iron and steel industry shall further insist on reducing capacity and disposing of zombie enterprises to promote recombination and offer resource and space for innovative development of enterprise in the industry.

Therefore, since this year, asset or debt recombination has become the key word of iron and steel industry.

State-owned Assets Supervision and Administration Commission of the State Council officially announced to agree the joint recombination of Baosteel Group Corporation and Wuhan Iron and Steel (Group) Corp. on September 22. China Baowu Iron and Steel Group Co., Ltd. has become the first giant enterprise with a capacity of 60 million tons steel in China’s iron and steel industry after the recombination, rising to the third in capacity ranking of crude steel of global listed steel enterprises.

Baosteel Group Corporation and Wuhan Iron and Steel (Group) Corp. will cut down the overlapping capacity after recombination as required for cost control and resources configuration optimizing, and will promote balance of market supply and demand through adjusting their own production rhythm. This shall benefit to promoting concentration ratio of iron and steel industry and realizing scale effect, and materially boost supply side reform and capacity reduction of the industry. Insiders considered that the recombination of them pulls open the curtain of a new round of state-owned iron and steel enterprises' recombination. It is predicted to boost the consolidation of iron and steel industry.

China's iron and steel capacity has been cut off by 21 million tons by the end of this July, completing 47 percent of the annual task. Capacity reducing has been reinforced from central to local levels since August. It is reported that by the end of September, the capacity reduction of iron and steel industry has made active progress and completed over 80 percent of the whole year target task load. Insiders expressed that the acceleration of capacity reduction will benefit the better transformation of the whole industrial ecology.

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