Bai Jiangshan: Prices of HR strip will struggle to either rise or fall sharply

Asian Metal: Thank you for taking the time to talk with Asian Metal. Could you please give us a brief introduction to Lituo Trading?

Bai: Actually, we also have another company and its name is Handan Yonghe Mechanical and Electrical Co., Ltd. We are mainly in the business of trading HR wide strip from Zongheng Steel and Puyang Steel. In addition, our company is also the agent for some steel plate and HRC steel mills. Normally, we will hold regular stocks of 3,000t, and they could be 5,000t when the market is very good. However, our stocks are only 2,500t at the moment, influenced by the maintenance of steel mills and unsatisfactory market conditions. Though we are keeping our inventory at a low level, we will replenish it every day or every week, so we can provide sufficient materials to every client.

Asian Metal: As far as I know, the market stocks of HR strip have greatly decreased and the difference in price between HR strip and HR coil is narrow, so could you analyze this phenomenon?

Bai: Yes, you are right. The total stock of HR strip is pretty low at the moment due to steel mills’ maintenance, and some popular grades are out of stock now. As for the difference in price, it is influenced by the market. When we began the business of trading steel products in 2002, the price of HRC was RMB800-900/t higher than that of HR strip, but it is only RMB100/t now — while sometimes the price of HR strip is the same as or higher than that of HRC, which makes it hard to make deals. I think the main reasons are as follows:

1. Information transparency: As there are so many information websites and they all update raw material costs and production costs, it is impossible to earn as much profit as before.

2. Same production process: The only difference is the size — we all have the same production process. Meanwhile, the equipment costs for HRC are higher than for HR strip, so the HRC price is usually higher than the HR strip price.

3. Some clients only want to purchase HR strip, even though the price is higher than HRC. There are certain customers who have to use strip with a width of 685mm and 735mm, so they will purchase HR strip instead of HRC. And it is a concession for them to purchase HRC.

Asian Metal: How do traders run their business under the influence of settlement policies?

Bai: In general, steel mills will publish the concluded price at the end of the month, and the wide strip price is usually RMB50/t higher than that of narrow strip. Sometimes it is too high and traders do not make a profit or even lose. Under such conditions, we usually deliver materials after we have received payment.

First of all, we will guarantee that we can provide enough materials to every client who has made a payment, and actually, we maintain steady cooperation with a lot of clients. Only in this way can we release the pressure of withdrawing funds and avoid risks.

Besides, we aim to achieve product diversification. We also have plate and HRC, which are more popular in the market, so we can reduce the potential risks.

Asian Metal: Currently, the price of raw materials and HR strip keeps going up. What do you think about the market outlook?

Bai: I am still cautious. The price of HR strip increased so much in the first two weeks of the month, and prices of HRC and rebar in the futures market also showed a strong upward trend. But I think the reduced output is the main reason for the price increase, so the inventory of HR strip remains at quite a low level. Besides, some popular grades are out of stock for the time being. A number of large agents with a regular inventory of 20,000-30,000t only have small stocks or no stocks at all now. In view of that, I think the price will not go down sharply due to the low inventories. However, the demand from downstream industries is limited, so prices will also struggle to go up sharply.

Asian Metal: It is hard to deal in the trading business at the moment, with its high risks and low profits, so can you tell us how you are able to handle the business and be successful?

Bai: Great changes have taken place since 2009, and the steel trading business is harder and harder. We insist on exploring and reforming. The following experience is very important:

1. Scale down: Under the pressure of a tight credit policy, traders have to scale down. On the one hand, it will release pressure to withdraw funds and we do not need to boost sales; on the other hand, keeping low stocks can avoid potential losses.

2. Identify customers’ needs effectively and provide them with different services：although our sales were cut back, the quality of clients was better and their quantity increased. So many traders suffered losses last year and we did not. As we maintain cooperation with more downstream users in order to provide appropriate materials for them, we have a lot of regular customers, as well as new ones.

3. Share profits with customers: 30% of our materials are sold to traders, while 50% of the materials are sold to downstream users. To guarantee target sales volumes, we need to cut our own profits by RMB10-20/t, and let our customers and partners make more profit. We can maintain the operational relationship over the long term in this way.

Asian Metal: Thank you for taking the time to speak with us and we wish your company a bright future.