The downturn in the Chinese steel market has continued for three months. During this time quotes of the major type of steel has fallen to the level of September-October of last year and continue to decline. A very significant negative impact on the market by the recent decision of the Corporation about Baosteel reducing June quotations for flat products for $24-29 for the so Her example was followed by many other producers of steel in the country.
Of course, cheaper steel production in China caused by its excessive production. As it is now openly acknowledged by the representatives of the steel companies, they overestimated the level of demand for rental. Last year's announcement of a new program to stimulate the national economy through investments in housing and infrastructure have given steel manufacturers the optimism which in the end proved to be unworkable.
Contrary to expectations, Chinese authorities have been slow to invest in new projects. Earlier this year, significant growth occurred only in the field of railway construction. At the same time, investment in real estate in the first quarter of 2013 decreased by 2.7% compared to the same period last year. Experts attribute this to the change of leadership in the country after the XVIII Congress of the CPC held in November last year. The government, in the administration of the provinces and counties came a new people who are still dealing with stuff left behind by their predecessors, and have so far refrained from major expenses. Moreover, the previous stimulus program, implemented in 2009-2010, led to a sharp increase in debt of regional administrations.
Anyway, the consumption of steel production in the country was much lower than expected. Thus, in the conditions of falling of the prices consumers try to maintain stocks of steel products at the minimum level. This leads to further reduction of apparent demand and only reinforces the weakness of the market.
All experts recognize that to achieve a breakthrough will be possible only through a radical restriction of output. However, this is not happening. According to the Chinese steel Association CISA, the level of steel production in April, almost not inferior to the record of the March indicators. Thus, the proposal will continue to remain excessive.
Why is this happening? First of all, Chinese steel companies do not yet feel a serious need for a decommissioning of excess capacity. According to CISA, the majority of large and medium-sized companies in the industry have completed the first quarter of 2013 with a small profit. This contributed to the decline in raw materials – iron ore, coking coal, scrap metal. In addition, the leading metallurgical company of China in recent years very actively engaged in energy efficiency and reduction of other expenses. Chinese companies were traditionally considered not very effective and full of people, so they have considerable internal resources to increase profitability. Some large manufacturers are striving to develop products with higher added value, up to automotive parts, for example, that also enhance their profitability.
According to official projections, steel production in China this year should reach 742 million tons, 4.7% more than in the past. But in the first quarter, the growth rate exceeded 10%, and for the period from January to April, the industry is based 775-780 million tons per annum equivalent. In principle, this corresponds to the estimated cumulative capacity of the Chinese steel industry (a little over 1 billion tons per year), but significantly exceeds the needs of both internal and external market. In April Chinese steel exports reached 5.55 million tons, but to find buyers abroad more than 6 million tons of products per month, is likely to be unrealistic.
So, the situation in the Chinese steel market is unchanged. Accordingly, rental rates are likely to continue to decline in the foreseeable future.
 
Victor Tarnavsky
Rusmet.ru