Chinese steel traders abandon practice of ‘hoarding steel’

In order to survive what is being described in China as a ‘meagre profit period’ for the steel industry, Chinese steel traders have abandoned the practice of hoarding steel at low prices for delayed sales at a higher price. Why? Because steel prices remain low and the high cost of stockpiling can lead to bankruptcy.

These days, according to a report by China Metals, steel traders only place orders with steelmakers after receiving orders from end-users and most opt for direct delivery to save warehousing and logistics costs. For the past eight weeks, ‘social stockpiles’ of steel have continued to fall.

Some steel traders have started new businesses. Haotian Steel of Tianjin City is now supplying steel makers with raw materials, such as billets, iron ore powders and coking coal as its mainstream steel trade has tailed off over the past two years. The company is also getting involved in mining and the deep processing of steel products. Other companies – Jinghua Shengye, Ji Yumin and Bailian Xiongye – have also moved both upstream and downstream of their original remits.

Some traders have diversified into the cigarette industry, the chateau business, the world of culture and the alcohol trade, not forgetting one trader, Hao Yun Fa, who branched out into the world of lavender estates.

The Chinese steelmaking industry made an average profit of RMB0.84/tonne in the first 10 months of 2013 during which time it produced 652Mt of crude steel. The combined revenue of the country’s major steelmakers was RMB12.97 billion, according to the China Iron & Steel Association (CISA).

The average price per tonne of Chinese steel was RMB3,462 (January to October 2013) which was down by 8.94% over 2012 prices. Such a price decline has cut overall steel sector revenues by RMB26.62 million.

China’s steelmaking industry will remain in troubled waters in 2014 due to the country eliminating excess production capacity. Prices, says CISA chairman Zhang Changfu are unlikely to rebound in the new year and, because of environmental protection measures being taken by the Government, steelmakers will endure higher production costs.

According to Moody’s Investors Services, China’s tolerance for slower GDP growth and the switching of its growth engine to domestic consumption from infrastructure spending will moderate steel demand growth. It said that prices will remain ‘historically low’ as the ‘global supply-demand imbalance continues to put pressure on steel prices’.

In fact, Moody said that Chinese steelmakers will continue to struggle at breakeven levels and remain the least profitable in Asia.

Source: China Metals.