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Analysis: China’s steel industry experience of austerity

After a year of credit tightening as well as efforts to
cool the real estate industry, the Chinese government’s restrictive policies
began to have a significant impact on the real economy. Steel pipe, cement, copper and other raw materials industries have
the most obvious effect. These industries and the construction industry are
closely related to the growing cooling real estate market. Due to the weak
demand from China, in
mid-October China’s
steel¡¯s daily production fell to its lowest level since January, last month the
global iron ore prices have fallen more than 30%.

“We feel that winter has arrived,” CISA vice
chairman Zhang Changfu said. “The market has witnessed a major turnaround.
Orders are gradually drying up.” He pointed out that new orders are
sharply shipyard in the first nine months, fell 43% that the market environment
was deteriorating.

12
months ago, China
began to tighten monetary policy. Policy makers raised interest rates and bank
reserve ratio to curb inflation and slow growth. These policies are now
beginning to impact on the raw materials.

Due to
40% of the steel industry demand is closely related to the real estate industry
which is growing for cooling in China, the steel has become one of the
industries has hardest hit.

As the
Government’s purchase of housing and credit crunch, housing construction has
slowed down. CREIS show that housing stock is equivalent to more than 11 months
of sales, the highest level for the past few years. At the same time,
residential property prices in October fell 0.23 percent, the largest decline
of this year. This in turn means that, even if steel demand unexpectedly weak,
overall demand for steel this year of China will continue to grow. As
stocks fell, Chinese demand will rise, iron ore price in this week is stable
after felling sharply last month.

Some
steel companies are either difficult to obtain their loans, or trapped in the
high borrowing costs. In the past is the bank chasing steel companies scrambled
to lend to you,” China Steel Association Deputy Secretary-General Qu XiuLi
said, “But now steel companies chase banks to have loans.”

Qu XiuLi
said the credit tightening increases the cost of steel and other industries,
these industries usually have higher levels of debt. “Liquidity problem is
not just looking for bank loans, is also a money liquidity problem. Our debt
ratio is high, so capital costs are high.” In the other side of the iron
ore trade, the buyer has been slowing down purchasing, because the nervous credit
environment is prompting them to reduce inventory.

China’s
second largest steelmaker Baoshan Iron and Steel said last week, some customers
require them to delay the delivery. Other heavy industry companies also warned
that they expect the risk of customer default will increase, or in the refined
copper products shipped require customers to pay in cash.

“What
we are no longer marketable,” a trader of construction steel tube of Inner Mongolia
said. “In the next two months, our steel inventories will increase”,
he explained at the same time that his company will continue to purchase steel
with the large steel companies signed long-term contracts. However, in response
to weak demand situation, many small companies which are sensitive to prices
have started to decrease production last month. Slowdown in demand has led some
economists predict that China’s
demand for raw materials may have peaked in the near future.

However,
analysts who prefer to bullish insist that the tightening effect is limited to
a few industries, and believe that soon it may usher in a policy shift. Guotai
Junan Securities economist Wang Jin said after the decline in industrial
profits in September and October PMI¡¯s weak data, the relaxation of credit just
around the corner. He said, “We expect to introduce a more neutral policy,
including the possible reduction of bank deposit reserve ratio in the fourth
quarter of this year.”

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