Analysis of Development Trend of Steel Market in 2013

As the main economic indicators stabilize, the darkest phase of China's steel market seems to have passed, with a modest uptick expected in 2013. Domestic demand is stronger than external demand, and the currency factor is playing a key role in pushing prices higher. However, uncertainties like the debt crises in Europe and the U.S. continue to pose challenges, making the recovery process bumpy. Firstly, the worst phase of market demand has passed. In 2012, economic indicators such as fixed asset investment and industrial production growth rates shrank, leading to weak steel demand in China. To avoid an economic hard landing, relevant departments introduced measures to boost domestic demand, particularly accelerating project approvals. By early September, the total investment approved by the National Development and Reform Commission surpassed 5 trillion yuan. In October alone, railway infrastructure investments reached 69.8 billion yuan, up 2.4 times year-on-year. It’s projected that railway infrastructure investments in 2013 could exceed 500 billion yuan, significantly higher than last year. These developments have helped stabilize China’s economy, including steel demand, in the fourth quarter. In October, the Purchasing Managers' Index (PMI) was 50.2, rising for two consecutive months above the critical line. Fixed asset investment, industrial production, and export trade all showed comprehensive growth in September and October. Steel prices and production also rebounded sequentially. These trends suggest that the worst period for steel demand has passed, and with government policies to expand demand, steel demand is expected to grow moderately in 2013. Crude steel consumption, including exports, is projected to reach 750 million tons, marking over a 5% increase from last year. Capital construction and related investments in machinery and equipment are primary drivers of steel demand growth. Approved projects, especially transportation ones like urban rail and high-speed rail, consume significant amounts of steel. These projects require substantial mechanical equipment and materials, laying a solid foundation for steel demand. From a product variety perspective, construction steel, railway steel, machinery steel, vehicle steel, and specialty steels are expected to see notable demand increases. Looking ahead, most projects approved from June to August will begin reflecting steel demand in the spring of 2013. In the new year, external demand remains challenging due to factors like the European crisis, the U.S. fiscal cliff, and tensions in Sino-Japanese relations. This has led to domestic demand being the main driver of steel consumption, creating a pattern of external weakness and internal strength. Steel exports are expected to reach around 55 million tons, with growth rates dropping significantly compared to last year, possibly even declining. Indirect exports, including autos, ships, machinery, and appliances, are also anticipated to perform poorly. Secondly, domestic steel production slowed in 2012 due to weak demand, becoming a major contributor to the oversupply issue. From January to October, crude steel production grew only 2.1% year-on-year. It’s estimated that the annual growth rate will be around 3%, far below the average 10% seen in recent years. The recovery in steel demand will inevitably lead to increased domestic production. Annual crude steel output is expected to reach or exceed 750 million tons, growing by over 4%, surpassing last year’s level. Production of steel products like rails and plates may decline, while rebar, wire rod, and steel pipe outputs are expected to grow significantly. Hot-rolled sheet output may decrease. The accelerated production of crude steel, coupled with low iron ore levels and shrinking domestic mining, will drive up demand for imported iron ore. Annual imports are projected to reach or exceed 800 million tons, growing by over 5%. Thirdly, multiple factors are setting the stage for price increases. Weak steel demand in 2012 caused price shocks, but stabilization of economic indicators has gradually boosted demand, improving supply-demand dynamics. In 2012, raw material prices like iron ore and coke plummeted by over 30%, weakening cost support. However, since September 2012, iron ore and coke prices rebounded, with CIF prices reaching 30%. This indicates a relatively high market outlook, which will support steel prices going forward. Steel traders appear less inclined to “winter stockpiling,” which could suppress steel production during winter. This will help balance supply and demand post-spring. Importantly, developed nations like the U.S., Europe, and Japan have implemented ultra-loose monetary policies, increasing liquidity and weakening the U.S. dollar. This has pushed up international commodity prices, including steel, iron ore, and coking coal. Notably, despite the limited impact of the Fed’s “QE3” on U.S. recovery, large interest rate spreads and low domestic asset prices could attract “hot money” back to China. This influx will directly and indirectly raise Chinese commodity and asset prices. The *** exchange rate has been appreciating, signaling potential price increases. While appreciation lowers import costs somewhat, it cannot fully counteract the upward pressure from capital inflows on steel and related product prices. The combined effects of these factors will likely result in a gradual upward trend in China’s steel prices in 2013. Steel product prices are expected to be higher than this year, with construction steel seeing larger price increases than production steel. Assuming no second global recession, the Shanghai Rebar ** contract price may reach 3,800 yuan and 4,000 yuan. High-grade imported iron ore prices will continue to recover, with CIF prices reaching or exceeding $130 in the first quarter of 2013, averaging above $120 annually. Despite the new year’s rebound in the Chinese steel market, domestic and global uncertainties persist, making the recovery process volatile with significant price adjustments. Domestically, massive production capacity and intense competition among enterprises remain concerns. Once prices rise, companies are likely to expand production, disrupting supply-demand balance and causing losses. Externally, the ongoing European debt crisis, the U.S. budget crisis, and Sino-Japanese territorial disputes add risks, with the possibility of a prolonged economic conflict slowing growth. These uncertainties make raw material price fluctuations highly variable, with adjustments possible at any time. Nevertheless, the worst of the steel market has passed. Prices won’t return to this year’s lows, and the overall upward trend will continue.