Wang Jianhua, chief analyst of Mysteel is sharing his ideas on China’s iron and steel market
2016 Iron & Steel Market Review: A Replay of History
The year of 2016 witnessed a dramatic rebound of ferrous metal prices, which is unseen since the financial crisis in 2008. The price curve in 2016 is astoundingly similar with that in 2009, since in both years, the price of ferrous metal suffered from plummets, bearish sentiment shrouded the market, and policies stimulated the trading.
The logic behind this year’s iron and steel market could be concluded into four “mismatch”s. From Dec. 2015 to early Apr. 2016, amid a cloudy economy, steel mills were generally lack of confidence, so they slowed down the pace of production. The supply as a consequence could not match the rising demand when the busy season came, hence, the price was deemed to skyrocket to an extremely high level. And in the early April, while majority of the analysts argued that the ferrous metal’s price had already arrived at its summit, we expected a continuation of this price surge as Mysteel data told us the week on week decline rate in the early April was the sharpest one since the beginning of the year. This shows a mismatch of supply and demand.
The period from April 21 to June 24 is labeled the mismatch of profit. Based on an earning model of steel mills designed by Mysteel, we ascertained steel mills were enjoying a profit of 600-800 yuan per tonne, even over 1000 yuan per tonne for certain categories under the backdrop of an economic downturn. Owing to this, we predicted on April 21 that the price would turn to a downside until the mills sell products at a loss and reduce production. This fully demonstrates how useful data model is for price prognosis.
A mismatch of space and time began from June 24. At that point, we projected a possible record new high in the second half of the year. Some others still believed that the demand would undergo a seasonal slide in June. However, Mysteel’s data demonstrated that the drop in demand had bottomed out, which was shored up by daily trading volume. In addition, steel mills were approaching a break-even point at that time. Therefore, we foresaw a rebound of spot commodity price. And it turned out to be true. Later, in August, in a Wechat salon held by Mysteel Research Institute, we suggested that there would be a price fall during the late August and the early September. Our incisive investors thus grasped this opportunity to sell products when the traditional busy season is around the corner. To buy in when you could expect the future, to sell out when you are aware of the reality. We dub this the “mismatch of space and time”.
When it comes to the fourth quarter, the price soared up unstoppably. This could be attributable to the supply-side structural reform policy introduced by the central government. The price spike of coke and coal since September, especially after China’s National Day, embroiled the steel cost in inflation. It can be seen clearly from Mysteel graph that during October and November, the rise in steel did not arise from firm market confidence or strong demand, but was lifted by coke and coal price rally, which was directly caused by the 276-day production curtailment. This is called the “mismatch of policy”.
In retrospect, under the influence of these four mismatching factors, 2016 has been a year of surprises in the ferrous metal market, but the main logic behind remains effective: the balance between supply and demand decide the price.
2017 Iron & Steel Market Forecast: A New Cycle for Growth
To foresee the trend of steel market in 2017, we must take cycles into consideration. Single figures are groundless to draw any conclusion.
Economic cycle is one of key cycles to watch. No matter in terms of Kitchen Cycle, Juglar Cycle, Kuznets Curve, Kondratieff Wave, economic crisis period or China’s ten-year economic cycle, 2017 would mark the beginning of a new cycle and it would turn out to be an buoyant one, as all these economic cycles signify.
Politically, 2017 also shows positive signs. It is clearly stated in the meeting of the Political Bureau of the CPC Central Committee that we need to establish a great atmosphere for the coming 19th Communist Party of China (CPC) National Congress. Therefore, the downside risk is more limited in 2017 because the government tolerance for missing the growth target will be low in a year of leadership transition The Central Economic Work Conference introduced reforms of state-owned enterprises (SOEs), finance and taxation, social security and banking. We persist that these reforms will doubtlessly inject new energy into economy. In addition, 2017 is a year of particular importance for China’s 13th Five-year Plan. The blueprint drawn out in the previous years requires efforts from related parties to implement in 2017. Although disturbances like the new policies that would be taken by the U.S. president-elect, the Brexit process and referendum in Italy would cast shadows over the next year, but overall, 2017 is likely to see an uptrend in the new political cycle.
As for industrial cycle, 2017 will focus on supply-side structural reform. The reform, initiated in 2016, had witnessed some progress, but more efforts are needed in the next year. Coke & coal and iron & steel are the two paramount industries for reform. The deepening of such reform will surely result in reduction in steel production and thus be supportive for iron and steel market. Apart from decreasing production, the supply-side reform, on the other hand, will create demand. The real estate this year is not going to be as pessimistic as some others believe, since in recent two years, the construction starts laid far behind total housing sales. For this reason, the industrial cycle is also favourable for iron and steel market.
Commodity cycle usually lasts10 years, for one specific commodity, maybe 7 to 8 years, so 2017 would be a transaction year from the last commodity cycle started from 2008 to a new one. Two phenomena indicate that in this commodity cycle, the commodity price is expected to pick up. In the past, the rise in US dollar index will lead to decease in commodity price, however, the same principle is invalid now. The commodity price is now climbing up along with the increase in US dollar index. It is a reflection of a bullish sentiment. Moreover, there will be a period in 2017 for restocking, creating a considerable amount of demand.
To conclude, the theme for next year is seeking improvement in stability. And the essence for value return is a higher floor price, a higher average price and a higher peak price.
-Edited by Mysteel.net
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