China steel market booming, but steel demand growth about to slow dramatically

Peter Marcus recently returned from a two-week China trip. As usual, conditions on the ground in China are far different from what was expected when viewing China from afar. Some findings to date include:

• Incredible bottlenecks in the country’s transportation system. Our contacts indicate that the country’s railroad system seems to be increasingly inadequate to service its requirements. In a 20-day period ended August 9th, the Ministry of Railroads has boosted the allocation to 50,000 from 43,000 rail cars per day, of the total 100,000 rail cars available, to carry steam coal to electrical generating stations. We hear stories of massive stocks of iron ore – more than 25 million tonnes – at a variety of ports. We have also learned that independent coke producers are finding it extremely difficult to find rail cars for coke deliveries, and that the price for trucks has skyrocketed due to increasingly stringent regulations that prevent the overloading of trucks. Overall, transportation costs in China are up massively.

• · Spot steel prices in the Chinese home market are strong:

Long product prices are up sharply reflecting higher prices on the world market and the surge in steel scrap prices. Rebar is now priced at about 3,600 RMB ($435) per tonne, down only moderately from the high in the first quarter and far above the brief low of 2,600 RMB ($315) per tonne several months ago.

Hot-rolled band is about 4,500 RMB ($540) per tonne, including the 17% value-added tax, versus a brief low of about 3,700 RMB ($445) per tonne several months ago. When including about 100 RMB ($12) per tonne of transport expenses to the market, the mills’ typical FOB price would be about $450 per tonne. In comparison, two steel mills located close to the east coast told us that they are now seeking $550 per tonne, FOB the port – which is about in line with the world export price (or about $525 per tonne, FOB their plant). Chinese hot-rolled band prices are probably the lowest in the world. Spot hot-rolled band prices in the USA are the highest in the world at about $825 per metric tonne. All of the Chinese steel mills we have spoken to so far have significantly boosted their exports; yet the world export market has strengthened.

One steel trading group based in China ranked for us domestic Chinese steel prices, from relatively strongest to relatively weakest, as follows (with the strongest first):

1. Hot-rolled band
2. Slab
3. Cold-rolled coil
4. Plate
5. Wire rod
6. Billet
7. Rebar
8. Galvanized coil
9. Color coated sheet

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