By Kang Yi, Jiang Yunzhang, Zhang Xiaodong and Xiao Wei (康怡,降蕴彰, 张向东 ,肖薇)
Issue 615, April 15, 2013
News, cover
Translated by Zhu Na
Original article: [Chinese]

After a period of optimism spurred on by high hopes for rapid urbanization, the steel industry is now wistfully watching customers change the way they buy steel in order to capitalize on falling prices.

Ge Xin (葛昕), a researcher with the Beijing Lange Steel Information Research Center, reports that he heard of this trend recently at an industry meeting. He says in the past companies might book 10,000 tons of steel from a trader two months before construction and pay the entire cost upfront. Now however, they might divide shipment of that 10,000 tons over eight weeks and pay whatever the market price of the steel is at the time of delivery.

Lower cash availability among these companies is one reason for delaying purchases, but it has more to do with a desire to take advantage of falling steel prices.

“At the end of last year and especially in January this year, people all felt steel had a bright future,” Ge said. “It appeared that the steel market was booming. After Chinese New Year almost all steel factories increased production, and these increases were quite large.”

However, in March, the price for reinforcing steel (rebar) dropped more than 200 yuan per ton. The steel industry over the past three months has been described as a “roller coaster” and producers now feel they were overly optimistic.

A person in charge of the sales department at Shougang Changzhi Iron & Steel Co., Ltd confirmed this view. “Our optimistic expectation was mainly based on two things,” he said. “One was urbanization and the other was a general belief that the new government would bring a new round of economic growth.” 

He explained that many infrastructure projects with huge demand for building materials, like two subway lines Taiyuan, Shanxi, were slated to begin. Most steel factories saw projects like these and assumed there was renewed economic inertia. 

“Over the past three decades, enterprises have gotten used to new government leaders aiming high and going all out by releasing all kinds of new loans,” Ge said. “This has been the case every time. The enterprises have been spoiled.”

As the economy started to recover at the end of last year, steel companies started a new round of production. “At that time many steel companies were blindly restocking,” said Hu Yanping (胡艳萍), a steel analyst with Custeel.

According to statistics from the China Iron and Steel Association, the stockpile of five major varieties of steel in 22 cities reached 155.65 million tons in March - a historic high and a 22.9 percent increase from February. But there wasn’t nearly as much demand in the market as expected. 

“Steel factories’ and steel trading companies’ optimism relied on the promise of urbanization,” Ge Xin said. “But once the five new rules [regulating real estate] were launched, that confidence was destroyed and the market went downhill.”

The source from Shougang Changzhi Iron & Steel also found that many of the infrastructure projects expected to drive steel consumption were unable to get off the ground. “These projects have all been approved by the National Development & Reform Commission (NDRC),” he said. “But in terms of bank loans, it’s still very tight. A lack of funding has prevented these projects from taking off.” 

It hasn’t just been the steel, coal and cement industries that have had their hopes dashed over the past few months. Local governments have also had the wind taken out of their sails.

In November last year, the media reported that a plan would be launched around March’s “Two Sessions” promoting urbanization with a 40 trillion yuan investment over 10 years. This boosted market confidence. 

From the end of last year to January, all provinces started to introduce urbanization investment plans. And many provinces, such as Hubei, Jiangsu, Yunnan, Henan, Shanxi, Fujian and Heilongjiang, announced that their GDP growth target for 2013 would be at or above 10 percent.

NDRC also revealed that over 20 provinces and major cities set their goal for growth in fixed asset investment (FAI) at over 20 percent. Some even aimed for over 30 percent.

Moreover, almost every province put forward plans for developing large cities.  Hunan, for instance, made plans to construct six “big cities” and six “very big cities” by 2015. Even some small and medium-sized cities have put forward plans for becoming mega-cities or international metropolises. “To a large degree, this enhanced some investors’ optimism about the economic recovery’s momentum,” the source from Shougang Changzhi Iron & Steel said.

However, much of that optimism was killed when Premier Li Keqiang said in mid-January that new urbanization must follow the path of low-energy use and ecological conservation. Then, during the Two Sessions in March, president Xi Jinping told a Jiangsu delegation that urbanization must respect economic and social development laws. He said neither development that’s too fast nor too slow will work, and that the most important thing is the quality of urbanization.

Zhang Ping (张平), the former director of NDRC, said at the Two Sessions that the scale of big city and mega-city development must be controlled. Other NDRC officials have also criticized provincial and local governments for blindly engaging in the expansion of large cities.

Li Keqiang further stressed at a press conference on Mar 17 that new urbanization is human-centered and needs to carefully avoid “urban disease” (城市病), such as detrimental air pollution.

A source in the steel industry said that the statement and similar speeches from senior central government officials are obviously directed at local governments. The central government is trying to tame the impulses of local leaders to blindly pursue fast growth.

Fan Jianping (范剑平), chief economist at the State Information Center, stressed to local governments and enterprises that urbanization can’t be viewed as a jolt to stimulate the economy. A jolt is short, but urbanization needs long term planning.