Chinese steel prices may not improve in 2-3mths: SBB

Roger Manser, Consultant, Steel Business Briefing told CNBC-TV18 that he expects a mild recovery in the Chinese economy. He also said that the steel producers in China are certainly looking to raise prices as they have been forced to reduce prices due to over production and over capacity. However, he does not see any improvement in Chinese steel prices in the next three to four months.

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Taking into consideration the recessionary conditions in Europe, Manser believes the situation is slightly optimistic for the producers there as compared to those in China. "The market is moving in a much more balanced way in Europe and that means allowing the producers to increase prices maybe by 20 or 30 euros per tonne ex-works. I do anticipate an improvement in steel prices in Europe, but not a very significant one," he explained. Here is the edited transcript of the interview on CNBC-TV18. Q: How would you look at the steel situation in China? There is talk that prices of at least hot rolled coils may start rising a bit?
A: Not very much. We at SBB are anticipating only a mild recovery in the economy in China. As far as we can see the producers in China are certainly looking to raise prices and have reduced the prices, but spot steel prices have not followed as much.
In other words, China is stiff and is suffering from over production, over capacity in steel making. We do not anticipate any major improvements in steel prices in China in the coming three or four months. We do anticipate some recovery, but nothing very substantial because the market is oversupplied. Q: There is an argument that with a new leadership in place in the Communist Party, regional governments could start spending more on infrastructure. Do you see steel prices improving in 2013 as a whole?
A: My view on this is somewhat unusual. I do not anticipate any significant recovery in infrastructure expenditure in China and it is infrastructure which was driving the Chinese steel industry over the last decade, it is my belief that the new government which is reform oriented will look to slightly reduce the amount of expenditure on investment on infrastructure and shift the balance of GDP within China from investment to consumption.
This is something which has been suggested on a number of occasions over the last decade that around 50 percent of the national economy is too heavily focused on infrastructure investment. Therefore, it is my belief that the percentage will slowly decrease. It will not decrease very quickly, but it will decrease and that will reduce the steel intensity of the Chinese economy. It will leave the Chinese steel industry in a situation of oversupply for some months or even years to come.
I know that some people are talking about increase in steel consumption in China and there maybe a mild increase, but the emphasis is now moving away from investment towards consumption within the structure of GDP. Q: What is happening in the European markets? We hear that Italian steel prices have already gone up a bit. How much more can they rise given the recessionary conditions in Europe?
A: I think that there is an improvement and stocks have severely gone down in Europe over the last month or so. Consumers and end users need to buy more steel and that is on the consumption side. On the production side, producers have heavily cut production levels and are closing capacity.
The market is moving in a much more balanced way in Europe and that means allowing the producers to increase prices maybe by 20 or 30 euros per tonne ex-works. I do anticipate an improvement in steel prices in Europe, but not a very significant one. The producers are targeting 500 euros a tonne for hot rolled coil and I think they will probably achieve that sometime in January. I do see the situation a little more optimistic on behalf of the producers in Europe than in China.
_PAGEBREAK_ Q: You said that you do not see a significant upside in steel prices in China, but there could be a mild recovery in the steel industry in the next three to four months. In anyway could you quantify what impact China will have in general?
A: If you are talking in terms of steel consumption, then I would not anticipate an increase in steel consumption in China of more than a couple of percents. The ex work price for hot rolled coil I think will probably stay in low to mid USD 600 per tonne FOB China. That very much mimics the domestic price and so long as the producers manage to push up domestic prices a little bit, which they have, they will also seek to make some sort of export prices.
It will be transferred in spot markets, particularly in winter months the market is balanced pretty much weaker because demand is construction based, infrastructure driven in China and the seasonal factors as well as structural factors will play a role in the Chinese situation in the next three-four months. Possibly by 2013 spring I could envisage a somewhat bigger increase in prices in China to around USD 650 per tonne or something like that or a bit more. Q: How do you expect iron ore prices in Asia? Will they fall further?
A: It will not to fall a lot further. In the last couple of days they were around USD 115 dry metric tonne. If the prices of iron ore fall significantly then there will be insufficient iron ore available for the Chinese mills from the domestic suppliers. I do not expect them to fall significantly in the coming months.
I do see a long-term trend downwards in iron ore prices. But, it will not be an immediate impact. I think that they will slowly, over the next two or three years move down to below USD 100 per tonne CFR China, but that will not happen immediately. Q: How would you see thermal coal or coking coal prices trending in Asia?
A: As far as I can see, the coking coal situation is fairly analogous to the iron ore situation in terms of the market being relatively weak at the moment because the demand from the mills in China cannot be supplied largely by the domestic markets. They will obviously need good quality imports from Australia to continue.
I expect that will help stop the price slipping down too far. But, I do not see any major change in that. I do not see any great increase in Chinese crude steel production in 2013. I do not expect demand for either coking coal or for iron ore to suddenly take off because I think the demand situation for those raw materials will be based on the demand for finished steel. As I have said, I do not think the demand for finished steel is going to improve vastly in the coming months. Q: Do you see a possibility of coking coal prices sliding in 2013?
A: It will be subdued around current levels.