SECTOR PAIN IS CONSTRUCTION INDUSTRY’S GAIN - MEPS
2012 has been a difficult year for the Chinese steel
industry. Oversupply has plagued the sector – resulting in significantly lower
selling prices as the year progressed. Growth in demand from construction has
slowed. Tight lending regulations have reduced speculative investment in real
estate. New funding for infrastructure projects has been tightly controlled.
These government initiatives were specifically designed to avoid overheating the
economy - in particular through construction related projects. At the same time,
steel industry capacity was expanding and supply increasing. This resulted in a
steady decline in steel prices for products used in construction – typically
reinforcing bars, wire rod and coated sheet.
MEPS predicts that production of the three products, listed above, will increase
by 41 million tonnes in 2012 – a rise of 14 percent, year on year. This tonnage
equates to more than the expansion in output for the whole steel industry.
It is therefore not surprising that the price of steel for construction purposes
collapsed this year. The MEPS Steel Purchasing Price Index for construction in
2011 was 146.0. It dropped to 122.7 in 2012 – a reduction of 16 percent. This
translates into a total saving for the construction sector of in excess of
RMB200 ($US32) billion.
Without a change in government policies, we can expect little change in 2013.
Steel prices at the start of the year will be substantially below the average
for the prior twelve months. MEPS forecasts steel price increases in 2013.
However, the improvement is expected to result in the average MEPS Steel PPI for
construction reaching 122.8 – just above that recorded in 2012.
In this analysis, MEPS assumes significant price rises during the first three
quarters of the year, from the extremely low figures in September 2012 – which
is expected to be a 35 month low value.
The construction sector is the largest individual market for steel. It consumes
around half of all the steel produced in the country. It is worth remembering
that the revenue lost by the steel sector is benefitting the domestic real
estate and infrastructure industry.
This may not be too significant with the Chinese economic model which has
substantial state controls. However, in a western country the suppliers to
construction would have, of necessity, reduced supply to the market. This took
place in the Chinese plate market when demand for shipbuilding collapsed.
However, the rebar and wire rod manufacturers appear to be out of control and
are supplying significantly more than real demand. These are probably the ones
responsible for the under-reporting of crude steel and pig iron.
Source: MEPS China
Free Sample copy
China Steel Review
Sign up for free
MEPS steel news alerts