Domestic steel prices have fallen by more than 20% in a month, with further downward pressure expected in the medium term

　　Why have steel prices surged and plunged?

　　The "black series," which had been soaring for quite some time, is finally receding. Prices of bulk commodities, including steel, have all declined to varying degrees, with some steel products falling by about 30% in a single month. This has left many participants in the "black industrial chain" feeling worried after enjoying a year-long boom.

　　Market

　　The "black series" began to decline last month

　　Data shows that since early March, domestic iron ore and steel prices have undergone a significant decline, and the previously surging "black series" has begun to be viewed bearishly across the entire industrial chain. According to media reports, since mid-March, domestic steel prices have fallen by more than 20%. Take iron ore fines as an example: a month ago the price was 860 yuan per ton, but it has now dropped to 600 yuan, a decline of more than 30%. Iron ore prices have behaved the same way. In early March, the domestic iron ore price index exceeded 850 points, reaching this year's peak, and then began to fall, dropping to 620 points by late April, a decline of nearly 30%. Since March, Chinese steel product prices have also begun to be lowered.

　　The price decline of the "black series" has already directly affected important economic indicators such as the PPI. The peak year-on-year growth rate of industrial product prices in China has passed, and industrial product prices may face downward pressure in the future. Data from the National Bureau of Statistics shows that last month China's PPI rose 0.3% month-on-month, while year-on-year growth slowed by 0.2 percentage points from the previous month to 7.8%, ending a 14-month streak of recovery.

　　Analysis

　　Steel output rises but market demand stagnates

　　The prevailing market view is that changes in market supply and demand have caused the reversal in "black series" prices. Data released by the National Bureau of Statistics shows that in March, national output of crude steel, pig iron and steel products was 72 million tons, 62 million tons and 96.76 million tons respectively, up 1.8%, up 1.3% and down 0.7% year-on-year. Among them, average daily crude steel output reached 2.3226 million tons, up 6.42% year-on-year, a record high. In the first quarter of this year, China's crude steel output was 201.1 million tons, up 4.6% year-on-year. Industry insiders predict that China's steel output may hit a new high again in April this year. But in fact, the growth in steel consumption is clearly not keeping pace with the increase in output. Data shows that in the first quarter of this year, China's apparent consumption of crude steel was only 183 million tons. Although this was slightly higher than the apparent consumption of crude steel in the fourth quarter of last year, some institutions analyze that if the obvious increase in steel inventories (including steel mill and social inventories) in the first quarter is taken into account, after deducting this incremental inventory (unconsumed steel), China's actual crude steel consumption in the first quarter may actually be lower than in the fourth quarter of last year.

　　In fact, demand intensity for steel from traditional industries in the current Chinese economy has declined somewhat, but demand for high-end steel from high-end manufacturing and emerging industries will grow. Therefore, although overall Chinese steel consumption is expected to remain stable and grow slightly, the demand structure has in fact undergone significant changes, which will also determine the future trend of steel prices.

　　Focus

　　The intensity of capacity reduction will affect future steel price trends

　　Regarding the surge and plunge in steel prices, some industry insiders point out that future steel price trends will largely depend on the implementation of the country's capacity reduction policy, especially the intensity of dealing with "ditiaogang" (induction-furnace steel). "From another perspective, whether steel prices can be stabilized to prevent excessive increases is also key to whether capacity reduction can proceed smoothly, so at the national level the black series cannot be allowed to surge excessively," an industry insider said.

　　China is the world's largest steel consumer, accounting for half of global steel consumption. However, in 2015 China's steel industry saw a decline in steel consumption and a drop in steel prices, with losses among member companies of the China Iron and Steel Association alone approaching 80 billion yuan. In response, China proposed resolving overcapacity in the steel industry to achieve turnaround. Last year China's steel industry turned losses into profits, achieving profits of 30.378 billion yuan. Since the beginning of this year, China's steel industry has generally performed well. In the first two months, member steel enterprises of the China Iron and Steel Association earned cumulative profits of 12.811 billion yuan, with a sales profit margin of 2.41%, up 5.5 percentage points year-on-year. As steel prices gradually recover, industry confidence has also begun to recover. However, in the process of steel price recovery, irrational speculation has also created new risks for the steel industry, especially as some institutions have begun to speculate on steel prices under the pretext of capacity reduction. According to China's steel capacity reduction target through 2020, 100 million to 150 million tons of crude steel capacity will be resolved by then. At present, this target is expected to be completed ahead of schedule. Last year China completed ahead of schedule the target of resolving 45 million tons of crude steel capacity, and this year it has set a target of cutting another 50 million tons of crude steel capacity.

　　In addition, the government's plan to completely eliminate "ditiaogang" by June 30, 2017 may have an even greater impact on the steel market. Ditiaogang refers to steel rolled from raw materials made by melting scrap steel in induction furnaces at small smelters. Such steel carries quality risks because composition and quality cannot be effectively controlled during production. A steel trader told the Beijing Youth Daily yesterday that if the elimination can really be completed as planned by the end of June, it would clearly give a major boost to steel prices, but several steel traders said in interviews with the Beijing Youth Daily that completing the task on schedule will still be very difficult.

　　Expectations

　　Institutions say steel prices still face downward pressure in the medium term

　　According to the latest weekly steel market report released by relevant institutions yesterday, domestic steel prices last week first fell and then rose, but the overall decline remained obvious, and steel prices this week are expected to remain range-bound. Although domestic steel inventories fell slightly last week on a week-on-week basis, they were still up 17% from the same period last year and remain at historically high levels. Since the second quarter is the traditional off-season for steel demand, domestic steel demand is unlikely to pick up in the near term, so steel prices still face continued downward pressure in the medium term.