| China's 2008 Steel Market Forecast |
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How to understand the current characteristics of China's steel market? How to gauge the impact from China's macro control on the steel industry in 2008? How to grasp the direction of China's steel market in 2008? These are probably the most concerned issues for steel industry observers at the moment.
2007: One of the best development periods
First of all, China's steel industry had kept a steadily accelerating growth in 2007. According to the government-owned China Logistics Information Centre, demand growth in China's steel market had kept a steadily accelerating pace in 2007, with demand up 19% from 2006, and the growth rate was 2 percentage points higher than that in 2006. The steel market had grown in line with the macro Chinese economy in 2007, without obvious oversupply or supply lags. Secondly, demand and supply in the steel market were at a stable equilibrium in 2007, amid an improving market environment. In 2007, China's steel market development was in a benign situation for both suppliers and buyers, with less than 1% difference between supply and demand volumes. Such a balanced market had been a result of informed adjustments between both sides.
Thirdly, the steel price had been transited from a choppily upward trend at a high plateau, to an accelerating upward trend. Since 2007, due to both the booming steel demand in China and the firm or choppily upward international price, the steel price in China had witnessed a transition from a volatile upturn at a high plateau in the first three quarters, to a substantial growth in the fourth quarter. |
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There were three distinctive characteristics in the price trend. One was the firming at a high level and steadily going up. The second characteristic was the gradual acceleration. And the last one was that overall pricing was still in a reasonable range, although prices for certain products had broken the upper limits of their fair value recently, hence a possible correction ahead.
The fourth reason related to financial performance. As the Chinese steel market had been growing well and rapidly, steel companies generally saw improved financial performance in 2007. The profit growth of the overall steel industry is expected to be 65% for 2007, and key capital goods producers are expected to register operating profit growth of 45% on pcp, the fastest growth in recent years.
Market trend
In terms of market trend, since the fourth quarter of 2007, China's steel market had begun to show overheated signs. The already-accelerated growth seemed further strengthened, and the market was entering an overheated zone.
The first evidence related to steel supply tightening due to accelerated market growth. The second evidence was the speedy price growth, apparently exacerbating the inflation pressure. Another evidence was the resultant rising prices of downstream raw materials, lifting market operating costs. In December 2007, the purchasing price index component of China's steel industry purchasing manager index was at a yearly high of 88, up 1.6 percentage points from the previous month. The fourth evidence showing a gradually overheating steel market in China was the supply tightening of raw materials such as coking coal and iron ore.
Therefore, correctly gauging the magnitude of macro control by the central government and its impact on the steel market would be a key for objectively understanding the Chinese steel market in 2008
2008: Controlled development for the steel industry
China's macro economic environment should still remain benign in 2008, so strengthening the macro control by the central government should be beneficial to the sustainable development of China's steel market. The overall forecast trend could be summarised as "one slowing and three unchanged".
The "slowing" relates to the stabilising trend of steel market growth. As the macro economy will grow more steadily under the central government's macro control policy, it is reasonable to expect the current accelerated growth tendency easing. So the annual growth rate should be lowered than 2007.
The "Three unchanged" include the following aspects. One is that China's robust steel consumption should remain unchanged. Annual steel demand growth in China is predicted to be 15% in 2008, with a forecast export volume of 50 million tons.
Domestic market demand and supply balance should also remain unchanged. The supply and demand relationship is the foundation for a steadily developing market. Amid the trend of steadily rising demand and the government's policy of eliminating outdated steel production capacity, market supply growth is expected to be easing at a high level. But the overall steel production growth in China will be stabilising in 2008, so the balanced relationship between supply and demand should be able to stay.
The third "unchanged" relates to the high market price. The price trend from recent years indicates that since the steel market came out of the bottom in 2003, it had been on a volatile upward trend. This rising price cycle is partly underpinned by the strong demand, which should remain robust in the medium to long term. It is also lifted by the rising cost of energy and raw materials, which have created a floor for steel price. And the international market price is also at a high level. Therefore, it is expected that China's steel market price will at least stabilise at the current high level, and a substantial price retreat is less likely. Price growth may remain accelerated in the first half but stabilise in the second half, and the annual growth rate is expected to be 5%.
Source: www.gotoread.com
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