Monday, 23 March 2015

Iron & steel industry: fighting for survival amid downturn

In Commodity News 23/03/2015

As an industrial indicator, development prosperity of iron & steel industry continued to be weak. As CE iron and steel industry prosperity index report shows, the CE iron and steel industry prosperity index in the fourth quarter of 2014 was 97.3 points, flatting with that of the last quarter and hovering near 97 points the whole year without upward drive; Iron & steel industry early warning index was lighting year-roundly in the light blue area that represents the industry running rather cold. Among the four quarters, only the index in the second quarter went upward slightly and then downward continuously, while in the fourth quarter it fell further to near the critical low of the shallow blue area and may slip into the blue area that represents the over cold of the industry in next stage.
“At present, steel demand is weakening and production is in overcapacity that make the prices continue to fall and the steel industry situation very serious.” Chen Ziqi, deputy director of metallurgy and building material development department of China International Engineering Consulting Corporation, said that China’s economy is shifting from high-speed growth to medium- and high-speed growth. Iron & steel industry has entered a new normal 2 to 3 years earlier than the entire economy of the country.
2014 was the third year that iron & steel industry run into the downturn that characterized by obviously low growth, low price and low efficiency. China’s apparent consumption of crude steel fell 3.4 percent year on year and actual consumption of crude steel was flat or slightly down. As the conflict of supply and demand in the market was still outstanding, the steel prices fell to the record low again and again. In late December 2014, China Iron and Steel Association CSPI steel composite price index was 83.09 points, a drop of 16.19 percent year-on-year, and the drop of average price of eight varieties of steel fell about 10 percent in the whole year. As enterprise competition intensified, the cost advantage induced by the price decline of raw materials such as iron ore and coal has not truly turned into the competitive advantage of products. Iron & steel industry’s sales profit margin was only 0.85 percent, which located in the bottom of the industry.
This year, the situation of iron & steel industry is still not optimistic. Viewing from the market, the steel price index has continued the trend of felling slightly. In the second week of January, steel composite price index fell to 80.3 points, a new record low. According to the predicted results of CE iron & steel industry prosperity index model, the index value of the first and the second quarter will be 97.0 and 96.7 respectively, showing a trend of slight decline. In terms of enterprise expectation, entrepreneurs hold cautious manner to the run of the first quarter.
“For the complex and serious situation the industry will face in 2015, one should stay awake.” Zhu Jimin, executive vice president of CISA, warned that due to weakened demand of downstream industry, the market competition will be more intense and iron and steel enterprises will encounter new challenges in production and operation; Price fluctuation on main raw materials and fuel will bring uncertainty to the production and operation of the enterprises with in turn will increase management risk for enterprises; Problems like financial strain, financing difficulties and high financing costs will be hard to solve. At the same time, risks in exchange rate and debt can also be increased.
“The top priority of iron & steel industry today is to fully understand and adapt to the new normal.” Chen Ziqi argued that for the iron and steel industry, the new normal means the era of high-speed and high profit growth which are pulled by high demand growth has gone; The steel demand growth is clearly slowing and has entered into a dome-like platform area; Market oversupply has given prominence to the decisive role of market resources with prices of product and raw material being restrained; Enterprise competition has changed from homogenized to differentiated and enterprises with poor competitiveness and backward production capacity will be eliminated. Whether the understanding for the new normal is sufficient and whether the adjustment can be in time in place will directly decide the fate of an enterprise.
Over the past year, the precise macro-control and brisk market wind have actually driven the steel enterprises to focus on the market and find their ways themselves. At the same time, their ability to overcome difficulties has promoted and their initiatives for transferring the mode and adjusting the structure are enhancing as well.
First of all, the investment in iron & steel industry has become more and more rational without the momentum of blind expansion. In 2014, the fixed asset investment in iron & steel industry reached RMB 525.012 billion yuan, down 5.42 percent year on year and that of last year was an increase of 0.91 percent. Second, enterprises actively responded to market challenges and made the progress of cost reduction and efficiency increase. In 2014, under the circumstance of sales revenue felling 2.98 percent year-on-year, large- and medium-sized enterprises achieved 12.15 percent profits and taxes growth, 40.36 percent profits growth and sales profit rate up 0.26 percentage points compared with the same period of last year. Third, the acceleration of technological innovation has made a large number of new products being practically applied. For example BW300TP new wear-resistant steel doubling the machine service life or making it more long which helped technological progressing and upgrading for China’s large equipment manufacturing industry.
Although there have been some positive changes in the industry, but overall, it is difficult to eliminate the contradictions accumulated in the long-term and extensive development overnight, together with many external factors that coexist with internal problems, for a period of time, the iron & steel industry will still face the situation of low efficiency and high pressure. The industry should make sufficient preparation to fight toughly and long.
Insiders believed that in 2015, the iron & steel industry should place the mode transferring and structure adjusting in a more prominent position to speed up the change from large to strong, while stabilizing the market running. On the one hand, all departments and all localities should deepen constantly dissolving the contradiction of severe overcapacity according to the central government’s deployment, and make the iron & steel industry adjusting its structure orderly to ensure the survival of the fittest; On the other hand, iron and steel enterprises should lose no time to drive innovation, enhance the endogenous power and promote industrial upgrading. In the face of personalized market demand and tightened constraint of resource conditions, iron & steel enterprise can win the market and profits and continuously improve the quality and efficiency of development only if it speed up the transformation and upgrading, produce products that meet the needs of downstream industry for transformation and upgrading, provide personalized and customized products and services, and construct green iron & steel industry keeping pace with the times.