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Home > MEPS Steel News - 02.01.2013

CHINA’S STEEL 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 Steel Review


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