Interview
Sinkorswim
SteelOrbis Shanghai speaks with Leon Li, Research Director at STEELEASE, about new developments in the Chinese steel market that will have the most influence in 2014.
In 2013, with tightening monetary policy, Chinese domestic banks stopped credit for the steel industry. Currently, the volume of steel traders has seen a significant drop. What’s your view on prospect for the future of steel trading in China? LL: From 2012 to 2013, many traders dropped out of the steel trading market, with many even running away from their bank loans. Currently, most banks in China are very cautious about lending money to steel traders. e Dabaishu area, previously known as the steel trading center of Shanghai—comprised of nearly 5,000 steel trading companies, with transaction volume over 500 billion mt per year—is now filled with empty buildings. In 2012, 90 percent of steel traders in China saw losses, with 6-7 percent maintaining the break-even point, and only 2-3 percent making profits. Market insiders said there were more than 200,000 steel traders in China as steel industry has experienced rapid growth over the past 10 years. However, most steel traders did not have core competitiveness in the market, mainly playing the role of a middleman, buying from steel mills at lower prices and selling to end-users at a higher level. With the rising ecommerce platforms in the steel industry, prices became transparent, and their old way of making money could not last much longer. Some steel traders, who participated in developing new products and processing with steel mills and understood end-users’ demand, survive and live better than others. Some even take part in the raw materials field, to enlarge their business scope and engage in international trade of quality steel. Under the hard times of Chinese steel market, bearing the burden of oversupply, market insiders say only those steel traders upgrading their business model could move forward. In the short term, steel trading will be
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back to normal, indicating that trading itself instead of financing is the more reasonable activity in steel industry. Inventories of some steel traders will be sold to compensate financing, while traders will do their business in a normal way again. However, in the long term, steel trading will finally involve safe financing, instead of high-risk financing.
In mid-October, Dalian Commodity Exchange (DCE), one of the four futures exchanges in mainland China, launched trading of iron ore futures, which is the first iron ore futures offering based on physical delivery system. Market insiders think China will move a giant step forward in gaining pricing power in the global iron ore market. How do you think these iron ore futures will impact the Chinese steel market? LL: is iron ore futures launch has definitely exerted a certain impact on the original iron ore pricing system, but it’s too early to say that China will gain pricing power in the iron ore market. As a vital raw material in steelmaking, the iron ore market has several features. First of all, the supply is highly concentrated, with three giant miners controlling 70 percent of seaborne iron ore around the world. Secondly, the demand is of low concentration; China has the largest demand for iron ore, but there are too many steelmakers in China, lowering its power in the pricing system. Originally, buyers and sellers in the global iron ore market will negotiate iron ore prices annually, which would ensure the long-term supply and avoid high risks of price volatility. However, a severe economic crisis hit the world in 2008, dragging down this annual price negotiation between buyers and sellers in iron ore market. For those expecting high prices on iron ore futures to provide a new opportunity for Chinese buyers to gain pricing power, they will get declined. Actually, DCE’s iron ore Volume 7; Issue 1
futures is more like providing a platform for market participants, including miners, steelmakers, traders and financing institution, to trade iron ore of financial attributes. Unlike the independent pricing system of rebar futures in the Chinese market, iron ore giants still hold the pricing power throughout the world. But the futures system offers Chinese market players an opportunity to lock in profit and lower risks in the iron ore market, and gain interest arbitrage between rebar futures.
According to your extensive experiences in steel industry, what do you think are key elements that will influence the Chinese steel market in the future? LL: e Chinese steel industry is a highly market-oriented industry, indicating supply and demand are vital factors exerting impact on this industry. In China, oversupply will be a long-term situation for steel industry, which indicates demand will be more important for the steel sector. As for demand, there are many elements having influences on it, for instance, China’s economic growth, the central government’s policy and international environment, etc. For the domestic market, the central government’s policy will play a key role in stimulating steel demand. Taking post-2008 as an example, when facing the large-scale economic recession during that period, China’s RMB 4 trillion stimulus policy even caused investment boom for infrastructure construction, bolstering the steel industry significantly. However, it is expected that China will take actions in structuring adjustment in the following years to treat overheated investment-oriented economic development, suggesting the steel sector might be negatively affected. SO \
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