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China Metals Report Q3 2009Product Type: Market Research ReportPublished by: Business Monitor International Published: July 2009 Product Code: R302-7057 Description Over-supply and price volatility could undermine the recovery in China’s aluminium and steel industries,as BMI’s latest China Metals report forecasts a slow and uneven recovery.Over-supply and volatile market conditions have made producers anxious about upsetting a revival ofprices and profitability, leading to restrained production activity despite rising demand. Reports that 2mntonnes per annum (tpa) of smelter capacity had come back online in May look exaggerated, with someanalysts estimating that 1.5mn tpa had been restarted. At the same time, the increase in output has beendirected at rebuilding stocks by producers and the State Reserve Bureau (SRB), rather than sales. Despite problems of oversupply, China’s aluminium imports reached 362,400 tonnes in April, up 321%from March according to Chinese customs. The influx was caused by lower prices on the London MetalsExchange (LME) compared to higher prices in China, which prompted traders to exploit the arbitragegap, leading to a temporary surge in imports. Imports in January-May totalled 1.04mn tonnes, up 156.8%y-o-y. Exports in the first five months stood at 52,622 tonnes, down 82.9% year-on-year (y-o-y). InH209, BMI forecasts a rapid decline in imports due to market saturation. In the long term, the Chinesealuminium industry is expected to focus more on the export market, with BMI expecting a decline inimports. In the steel segment, over-supply also remains a continued source of anxiety, particularly among flatsproducers. The fear is that every time steel prices surge, output is increased, leading to a sudden drop indomestic prices. Daily average crude steel output was 1.42mn tonnes in the first four months of the year,higher than 1.37mn tonnes last year, indicating an annualised output of 520mn tonnes. By 2009, Chinahad total crude steelmaking capacity of 650mn tpa, which meant that Chinese output was on averagerunning at 80%, although BMI believes that longs production was approaching full capacity in Q209while flats capacity utilisation was low. Rebar and wire rod prices have picked up on improved demandfrom construction and real estate sectors, but flats have suffered a sustained downturn. The government’s push towards consolidation has prompted some M&A activity. Shougang Iron &Steel is in talks to buy a 58.29% stake in Changzhi Iron & Steel as well as stakes in smaller provincialoperations Xingyuan Iron & Steel and Guiyang Special Steel. In Q209, Shougang was reportedly intalks to take over Haixin Iron and Steel Group, the largest non-governmental mill in Shanxi Province. Shougang aims to buy up assets in Haixin to sustain its long products business elsewhere following thelaunch of the flat product-oriented Caofeidian project in 2010 and the permanent suspension of its Beijingoperations. Haixin Steel has been badly affected by the financial crisis, suffering plummeting demand andrising inventories. In November 2008, it closed four of its six furnaces. Shaanxi Longmen is also seekingacquisitions of smaller mills, encouraged by Beijing’s push towards consolidation within the steelindustry. Its main targets are 1mn tpa bar producer Lueyang Steel and 1mn tpa hot rolled narrow stripproducer Hanzhong Steel. BMI expects that scheduled new capacity could be delayed, while moves towards consolidation couldlead to the closure of smaller steel mills. With domestic steel demand set to decline and exports likely tofall, Chinese steel output will be lower than in 2008, with BMI forecasting a 6.7% fall to just under466mn tonnes. This is still above the government’s target cap of 460mn tonnes, which means that there isa likelihood of further price volatility and financial losses. With 100mn tpa of surplus capacity by 2009,China may have shut up to 20% of higher cost capacity over the long term while consolidation willimprove efficiency. As a result, the recovery in steel production will be at far lower growth rates thanseen in recent years, with BMI forecasting growth of 5.9% in 2010 and in the 6.5-8.1% range in thefollowing three years, totalling 615.7mn tonnes by 2013, a 23% increase over 2008. On the basis of trends within the automotive and household appliance industries, BMI forecasts a 19%fall in aluminium output to 9.8mn tonnes. We expect consolidation within the Chinese aluminiumindustry as a result of the collapse in both domestic and export demand, leading to the closure of smallersmelters - representing 48% of capacity by January 2009. As such, 2008 levels are unlikely to be reacheduntil 2013, with a sluggish recovery. Table of Contents
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