SHANGHAI, Jun. 4 (SMM) –
Steel Mills Cut Production on Rising Inventory Pressure
Signs are indicating that China’s steel mills are facing mounting inventory pressure, which not only escalated tensions between traders and mills, but also forced steel mills which have been in a dominant position to change their production plans.
China’s trading inventories for steel products slipped 20% since mid-March, while finished steel inventories at steel mills only edged down 7.8%. Analyst said that most steel traders kept their inventories low and were not active purchasing goods from mills, leaving mill stocks piled up.
In this context, many steel mills resorted to cut production.
According to a distributor of a large Henan-based steel mill, distributors had to purchase certain amounts of goods from mills each month, whether or not these goods will be sold out during the month. However, traders suffering tough situations started protest against mills by cutting purchases from mills.
Statistics show that steel inventories in trading market fell to 12 million mt in January and rallied all the way up before slipping again in mid-March. Trading inventories fell 19.2% from mid-March to late May. Declines in steel inventories varied by categories, with stocks for long products falling faster than slab. The data mirrored the lack of confidence among steel traders which prevented them from building stocks.
In contrast, steel inventories at mills slipped much slower. As the traders’ purchasing prices which are released by steel mills could not change quickly along with the market prices, the continuous falls in market prices often left purchasing prices higher than prices prevailing in the market. As a result, traders reported losses, and were not willing to order goods from steel mills, adding to inventory pressure for steel mills.
At mid-May, steel inventories at major medium and large steel mills in China totaled 13.68 million mt, up 590,000 mt from early May, and down 7.8% from the 14.83 million mt in late March. The number was significantly higher than the 9.41 million mt over the same period last year.
The trading inventories mentioned previously often refer to those traded in the market and do not include inventories at steel mills, but no official statistic for trading inventories were released as opinions have been divided on samples and period for statistics. However, the figures provided above covers long products inventories in 35 cities and slab inventories in 25-30 cities, which is enough to reflect traders’ actions.
Lecong Iron & Steel Trading Association, on behalf of more than 100 local distributors, sent an open letter to Anshan Iron & Steel, requiring rebates for their purchases in March and April, and expressed their resentment to the price policy for May of Anshan Iron & Steel. Before that, traders in Hangzhou and Ningbo also protested against Shagang and Jiangyin Changda Steel.
Nevertheless, deputy secretary of the China Logistics & Purchasing Federation believes that despite traders’ protests, the trading pattern of “payment first, goods later” between traders and steel mills remained unchanged, which will continue to bring high risks to steel traders.
Steel Mills Start Maintenance
Steel prices have been falling for several months following the Chinese New Year holiday, with prices for major categories down over 15%. Hot-rolled coil prices in Shanghai fell from RMB 4,280/mt to RMB 3,400/mt, compelling mills to cut ex-works prices and squeezing their profit margins.
Among the 80 medium and large mills surveyed by the China Iron & Steel Association in April, 34 reported losses, accounting for 40% of the total. Falling prices again left mills in red. Profit margin at medium and large mills for the first four months was only 0.23%, with the number in April alone at a mere 0.05%. Steel industry realized RMB 153 million in profit during April, only 6% of the figure for Q1.
Notably, in addition to large mills, some private enterprises also suffered losses.
Under such conditions, steel mills opted to cut production. Eleven blast furnaces were reported to be closed or suspended for maintenance, which will curtail 1.1 million mt in steel output. Six steel bar production lines will be under maintenance, cutting 405,000-410,000 mt in output. Maintenances will also be conducted to four hot-rolling lines, affecting 580,000 mt in output, and one strip production line, with 27,000 mt in output to be cut.
Whether further maintenance will be undertaken remained uncertain, but analysts say market will not show significant change unless the maintenances last for more than one month. That explains why the current market has not yet been largely affected by the recent maintenances.
Edited by SMM