Analysis of Development Trend of Steel Market in 2013

As the main economic indicators stabilize, the darkest phase of China's steel market appears to have passed, with modest growth anticipated in 2013. Domestic demand is stronger than external demand, and currency fluctuations have played a significant role in pushing prices upward. However, uncertainties like the European and American debt crises complicate the recovery process, making it far from smooth. First, the worst period for market demand seems to have ended. In 2012, several economic indicators tracking steel consumption, fixed asset investments, and industrial production growth declined, leading to weak domestic steel demand. To avoid a hard economic landing, authorities implemented measures to boost domestic demand, particularly accelerating various types of investment approvals. By early September, the National Development and Reform Commission had approved over 5 trillion yuan in total investments. In October, China’s railway infrastructure investments reached 69.8 billion yuan, a year-on-year increase of 2.4 times. It's projected that railway infrastructure investments in 2013 could exceed 500 billion yuan, significantly higher than last year’s levels. These efforts have helped stabilize China's economy, including steel demand, in the fourth quarter. In October, China’s Purchasing Managers' Index (PMI) rose to 50.2, marking two consecutive months above the breakeven point. Fixed asset investments, industrial production, and trade exports all showed positive trends. Steel prices and production began to recover sequentially, signaling that the worst of China’s steel demand may have passed. With government policies aimed at boosting demand, steel consumption is expected to grow moderately in 2013, with crude steel consumption (including exports) potentially reaching 750 million tons, an increase of over 5% from last year. Capital construction and related investments in machinery and equipment drive the majority of steel demand growth. Approved projects, particularly those focused on transportation—like urban rail and high-speed rail—are highly intensive in steel usage. This creates a solid foundation for steel demand. From a product variety perspective, construction steel, railway steel, machinery steel, automotive steel, and special steels are expected to see significant demand increases. Timing-wise, most projects approved between June and August will begin reflecting their steel demand in early 2013, particularly in the spring. In the new year, external demand remains challenging due to factors like the Eurozone crisis, the U.S. fiscal cliff, and tensions in Sino-Japanese relations. Consequently, China’s steel consumption is largely driven by domestic demand, showing a pattern of external weakness and internal strength. Steel exports are expected to hover around 55 million tons, with a slower growth rate compared to the previous year, possibly even declining. Indirect exports, including autos, ships, machinery, and appliances, are also expected to perform poorly. Second, domestic steel production has slowed significantly in 2012 due to weak demand, exacerbating the imbalance between supply and demand. From January to October, crude steel production increased by only 2.1% year-on-year. It’s estimated that the annual growth rate will be approximately 3%, a sharp decline from the average 10% growth seen in recent years. A recovering steel demand in 2013 will inevitably lead to a corresponding increase in domestic production. Crude steel output is expected to reach or exceed 750 million tons, growing by more than 4%. Steel product categories such as rails and plate products may see production decline, while steel bars, wire rods, and steel pipes are expected to grow at a faster pace. Hot-rolled steel sheets may experience reduced output. Accelerated crude steel production, coupled with low iron ore prices and shrinking domestic mining output, will increase reliance on imported iron ore. Annual imports are expected to reach or surpass 800 million tons, increasing by over 5%. Third, multiple factors are setting the stage for price increases. Weak steel demand in 2012 contributed to price shocks, but stabilizing economic indicators suggest improving supply-demand dynamics in 2013. In 2012, raw material prices like iron ore and coke plummeted by over 30%, weakening cost support. Post-September 2012, however, iron ore and coke prices rebounded by around 30% CIF, suggesting that future steel prices will have a cost floor. Steel traders appear less inclined to engage in "winter storage" this year. Should this trend hold, it would suppress steel production during winter, benefitting supply-demand balance post-spring. Importantly, ultra-loose monetary policies in developed economies have flooded markets with liquidity, particularly pushing up bulk commodities like steel, iron ore, and coal. Moreover, despite limited impact from the U.S.'s "QE3" on its economy, significant interest rate differentials and low domestic asset prices could attract "hot money," directly or indirectly inflating Chinese commodity and asset prices. The appreciation of the Renminbi has somewhat mitigated import costs, but it cannot fully counteract the upward pressure from capital inflows on steel and related product prices. These factors will likely result in a gradual upward trend in China’s steel prices in 2013. Product prices are expected to exceed this year’s levels, with construction steel experiencing larger price hikes than production steel. Assuming no second global recession, the Shanghai Rebar futures contract may reach 3,800 to 4,000 yuan. Iron ore prices, particularly imported high-grade ores, will continue to recover. By Q1 2013, CIF prices could reach or exceed $130, with an annual average above $120. Despite a modest rebound in the steel market in 2013, uncertainties both domestically and internationally persist. The recovery process will be fraught with challenges, including volatile adjustments. Domestically, overcapacity and cutthroat competition remain concerns. Once prices rise, companies will rush to expand production, disrupting supply-demand equilibrium and driving prices back down. Externally, unresolved European debt crises and potential U.S. recessions pose risks. Additionally, the prolonged territorial dispute between China and Japan could escalate into a long-term economic conflict, dampening growth in both nations. The UN and global economic bodies warn of rising risks of a double-dip recession, further complicating steel price movements. These uncertainties make price fluctuations inevitable in the coming year. Yet, the worst seems to be over. While the market won’t revisit this year’s lows, an overall upward trajectory remains intact.