Oversupply of hard-to-find steel prices is hard to change

On March 25, the State Council announced an increase in the export tax rebate rate for steel products, effective from April 1. Industry experts suggest that this move could shift export expectations, encouraging steel producers to offload excess inventory abroad. However, most analysts remain skeptical about a significant rebound in steel prices, as the industry continues to face oversupply challenges. Previously, the China Steel Association surveyed 25 major export companies and found that around 60% of steel exports in January were carried over from the previous year. Analysts predict that steel exports may drop by over 80% in 2009, increasing pressure on the domestic market. Sun Zhibiao, a mainland futures analyst, told reporters, “Weak foreign demand has created significant pressure on the domestic market. Since last year, many steel mills that had shut down are now restarting, with production rates reaching 70%. While output is recovering, external demand is declining, and domestic demand remains weak, leading to rising stock levels. The tax rebate helps ease this pressure to some extent.” Wire rod producers have benefited more from the policy. Between 2004 and 2007, rebar exports accounted for roughly 9% of total steel exports, while wire exports made up slightly more than 10%. Currently, domestic steel prices are higher than those in key export markets like South Korea, the EU, and the US, which has weakened their international competitiveness. Liu Zheng, a seafarer futures analyst, noted, “Increasing the export tax rebate for steel products benefits companies by lowering costs and regaining export competitiveness.” While the tax rebate is positive, analysts agree it won’t solve all issues. Sun Zhixi added, “Recent U.S. economic policies have sparked inflation expectations, providing some economic stimulus, but it’s unclear how long this trend will last.” Liu Hao believes that China’s construction steel exports are limited, so the tax rebate may not significantly impact rebar or wire rods. Data shows that rebar import and export volumes are small, as China is in a critical phase of urbanization, with high demand for building materials. Another concern is iron ore negotiations. Liu Xin highlights that steel prices in the second quarter remain uncertain, with raw material costs being the biggest unknown. He explained, “Rebar and wire rods are low-end products with less technological value, making them highly sensitive to raw material price fluctuations.” Earlier in March, Baosteel announced lower prices for its products in April, and Angang followed with a significant reduction in ex-factory prices, ranging from RMB 300 to RMB 550 per ton. Sun Zhiyi expects these price cuts to reduce the scale of steel mills resuming operations, and limiting production could help push prices up. However, if demand doesn’t improve, the cycle of production and stockpiling could be long and challenging for the industry.

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