The following article is from China Metallurgical News, the author is China Metallurgical News

China Metallurgical News.

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Editorial of China Metallurgical News

Since the beginning of this year, due to factors such as insufficient effective downstream demand and delayed demand start-up after the Spring Festival, domestic steel supply and demand have been unbalanced, steel prices have continued to decline, and the efficiency of steel companies has declined significantly. Especially since March, steel companies 'inventories and social inventories have increased rapidly, steel prices have dropped significantly, the marginal benefits of enterprises have declined, and the pressure on production and operation has further increased. Overall, the steel market presents a "three highs and three lows" situation of high output, high cost, high inventory, low demand, low price, and low efficiency, and the healthy development of the industry is facing severe challenges.

To this end, on March 28, the China Iron and Steel Association issued a proposal to "Recognize the situation and maintain determination to jointly safeguard the stable and orderly development of the steel industry", issuing initiatives from five aspects: "clearly understand the situation, unify ideological understanding" and "concentrate efforts to promote Orderly development","maintain determination, maintain market stability","deepen cooperation, achieve mutual benefit and win-win results", and "strengthen confidence, and plan production and operation". It has been more than two years since the Steel Association issued the "Proposal for Self-discipline of the Steel Industry to Build a Stable and Orderly Market Order and Promote High-Quality Development of the Industry", and the steel market has once again reached such a threshold. In response to the current market situation, there are several issues that must be clarified:

First, the situation is severe and the difficulties exist objectively, but this does not happen accidentally or suddenly.

Data shows that in the first two months of this year, China's crude steel output reached 168 million tons, a year-on-year increase of 1.6%. The equivalent apparent consumption of crude steel was 153 million tons, a year-on-year decrease of 1.95 million tons, a decrease of 1.3%. Steel market supply is significantly stronger than demand. In terms of inventories, steel company inventories and social inventories both increased year-on-year. As of early March, the Steel Association's key statistics showed that the inventories of steel companies reached 19.52 million tons, the highest level in the same period in history; the social inventories of the five major steel varieties in 21 cities monitored by the Steel Association reached 14.22 million tons, an increase of 7.3% over the same period last year.

"Oversupply" has been called for many years. Why has it been particularly prominent in recent years? It is not difficult to find that although supply has increased in the past, rigid demand has also grown simultaneously. Today, it is an indisputable fact that China's total steel consumption has peaked. The decline in total has become an inevitable trend. The steel market can no longer rely on demand growth to get out of the predicament.

For steel companies, it is more important to grasp the structural characteristics and trend changes of steel reduction in the context of the overall downward demand, and adjust the product structure accordingly. Taking this round of market as an example, the decline in steel prices has obvious variety characteristics. The price decline of construction materials such as steel bars and wire rods (wire rods) is significantly greater than that of other varieties, and the cumulative decline in the prices of some construction materials exceeds 10%.

Second, excessive supply cannot be absorbed by exports. It is logically unreasonable and cannot be absorbed by the international market.

As domestic demand weakens, steel companies increase exports in order to find a way out. Data from the General Administration of Customs show that in the first two months of this year, China exported a total of 15.912 million tons of steel, a year-on-year increase of 32.6%; the average export price was US$791.7/ton, a year-on-year decrease of 32.1%. Steel exports are showing a trend of "increasing quantity and falling prices"."Trading price for quantity" is not worth the gain and is actually undesirable. Moreover, is overseas demand really so hot? In fact, it is not the strong demand in the international market that drives steel exports, but the supply pressure is high and the domestic market is difficult to digest, so we can only rely on exports. This is not in line with China's steel export policy guidance, but also easily causes trade friction in foreign markets.

Steel companies have increased production, which has brought support to the volume and price of imported iron ore at the raw material end. Data from the General Administration of Customs show that in the first two months, China imported a total of 209 million tons of iron ore, a year-on-year increase of 8.1%; the average import price was US$131.1/ton, a year-on-year increase of 13.6%. Even though the prices of individual raw and fuel varieties have declined since the beginning of this year, the overall price of raw materials has remained high, exacerbating the severe situation in the industry.

What needs to be noted is that the hidden international trade risks behind the sharp increase in exports continue to accumulate, which has triggered a new round of trade frictions. Since 2023, the United States has launched countervailing investigations on Chinese tinplate, India has delayed the renewal of its BIS certification certificate, and Thailand has conducted anti-circumvention investigations on hot rolled products imported from China. Recently, Turkey, South Africa, Brazil, Vietnam and other countries have launched or are about to launch anti-dumping investigations against Chinese steel products, which will pose huge challenges to China's steel product exports.

Third, if we do not produce on demand, the market will definitely be vigilant.

For enterprises, efficiency is the lifeblood and a concentrated expression of corporate value and competitiveness. During this period, the steel market has been chasing gains and killing losses, which is not conducive to the smooth operation of the market. Some companies even choose to compete at low prices, creating a vicious cycle and creating a situation in which prices continue to fall and profits are at a meager profit. At present, steel prices are already lower than the cost lines of some enterprises, and some enterprises have operating difficulties and are in a state of loss. Data shows that from January to February this year, both domestic and international steel prices showed a downward trend. The average value of China's Steel Price Index (CSPI) was 112.30 points, a year-on-year decrease of 3.80%; the total profits of key statistical steel companies fell year-on-year. 35.32%, the average profit margin dropped by 0.2 percentage points year-on-year, and the loss area increased by 6.49 percentage points year-on-year. As of the end of February, the asset-liability ratio of key statistical steel companies increased by 0.61 percentage points month-on-month and 0.71 percentage points year-on-year.

We must realize that all companies in the industry are a community with a shared future where everyone thrives and everyone loses. Many companies hope that they will produce more and dilute costs, hoping that other companies will cut production first, causing the steel industry to fall into the "prisoner's dilemma" again, which not only expands the company's losses, but also seriously affects the overall healthy development of the industry. Steel companies should improve their political stance, maintain strategic determination, oppose dumping below production costs, and jointly create a fair and stable market environment; at the same time, they must enhance their awareness of risk prevention, control sales channels, and jointly maintain market stability and order.

At present, organizing production in accordance with the principle of "three determinations and three don't" is an important move for steel companies to overcome difficulties. Steel companies must adhere to the principle of "determining production based on sales, determining production based on efficiency, and determining sales based on cash", strengthen self-discipline, reduce ineffective supply, control production rhythm, and maintain profitability. In particular, some steel companies whose main products are construction steel should appropriately reduce production intensity. They can consider advancing the annual shutdown and maintenance plan to resolve corporate inventories as soon as possible and reduce corporate operating risks. At the same time, leading enterprises must take responsibility and set an example, give full play to the role of market "stabilizers", and promote the smooth operation of the steel market.

Fourth, China's steel demand is still huge, which is a source of confidence.

It is true that in the process of China vigorously promoting supply-side structural reforms, accelerating the realization of the "double carbon" goal, and carrying out the construction of ecological civilization, emerging industries and future industries such as new energy, new materials, energy conservation and environmental protection, new energy vehicles, and high-end equipment manufacturing have developed rapidly, the development of downstream traditional industries has slowed down, and the demand for steel has declined. This is a normal manifestation of the high-quality development of national economic construction. A period of imbalance between supply and demand cannot collapse. What is certain is that China's steel consumption demand, which is still in the process of industrialization, will remain at a high level for a long time.

Not long ago, the State Council issued the "Action Plan to Promote Large-scale Equipment Renewal and Exchange of Old Consumer Goods for New Products", which will help stimulate the release of demand for terminal steel and support the stable operation of the steel industry. Steel companies must seize the opportunity, thoroughly study and analyze the new characteristics and trends of this round of actions, focus on changes in end customer needs, and make targeted structural adjustments and product upgrades.

Fifth, steel companies urgently need to enhance their ability to adapt to the market and freely deploy supply.

To solve current market problems, we must start from the supply side. Steel companies must be proactive and follow the self-disciplined production method of "meeting user needs and balancing supply and demand", strengthen enterprise self-discipline, strengthen regional self-discipline, and strengthen industry self-discipline., control the pace of production and promote the dynamic balance of supply and demand.

We must realize that self-discipline and effective control of output in the industry are important choices for achieving high-quality development in the new development stage. Self-discipline control of production and reduction of inventories is the best "prescription" to deal with the current steel market situation. Steel companies must abandon the traditional scale-centered management concept and shift to a quality-centered management concept, fully realize that high inventories under the current market situation are a manifestation of the industry's immaturity, and control production and reduce inventories as soon as possible.

Sixth, the market is saturated, and companies that should withdraw should actively consider withdrawing.

China's steel industry has experienced storms and has developed to today's size and scale, and its production capacity has become saturated. With the overall downward trend in demand, it is time for some companies to consider withdrawing voluntarily. This is a wiser choice. In fact, some companies have already done so.

Of course, withdrawing will definitely be accompanied by strong pain, which requires government departments to introduce policies to help these companies withdraw in an orderly manner and provide certain guidance. Simply relying on market-oriented means to exit may also bring some fluctuations to the market. Therefore, a "tangible hand" is needed to intervene in a timely manner to improve the overall quality of China's steel industry.

Fortunately, there is still a "warm wind" blowing in the "severe winter". Although the current steel market situation is severe, we have seen that since the beginning of this year, the overall operation of the steel industry has remained stable. More companies have proactively and proactively adopted measures to reduce production and limit production to deal with market fluctuations, and the strong resilience of the industrial chain has been reflected. The so-called "cold winter" is just a season. The key is whether steel companies have the ability to withstand the "cold winter". We