Asian Metal: Please give us a brief introduction of your company.

Chen: It is my pleasure to be interviewed by Asian Metal. Our company, Wurong Materials Co.,Ltd mainly deals with non-grain oriented electrical steel from leading producers including WISCO, Ansteel, Masteel and POSCO Guangdong Shunde. We target at end users in Guangdong Province. Currently, our average monthly sales volume is 1,000 tons.

Asian Metal: Non-grain oriented electrical steel prices witnessed a sharp downward trend in the past Q3. According to Asian Metal’s statistics, the average price of low grade non-grain oriented electrical steel decreased by RMB700-800/t (USD110-126/t) during the third quarter. What do you think of this phenomenon?

Chen: Actually non-grain oriented electrical steel prices have started to go down since Q2. The price decreased by RMB500-600/t (USD79-95/t) during Q2, recording a sharp downward trend just like it did in Q3. The main reason for the price decrease is the weak downstream demand. The current downstream home electronic industry is worse than last year. Moreover, raw material prices also demonstrated a sharp downward trend. Let us take cold rolled coil (CRC) as an example: The average price of CRC in China fell by RMB500/t (USD79/t) in Q3.

Asian Metal：Could you give us an account of the current situation of non-grain oriented electrical steel’s downstream industries?

Chen: Home appliance is the most important downstream market of non-grain oriented electrical steel. Let us take the rotary air compressor used in air conditioner as an example: The total production of rotary air compressor was 8.335 million units in September, decreasing by 20.42% year-on-year. The sales volume was 8.35 million units, decreasing by 19.91% year-on-year. The inventory was 4.578 million units, increasing by 2.23% year-on-year and 0.55% month-on-month. I will give you another example. The Gree Air Conditioner, a widely known Chinese air conditioner producer, seldom cut prices to compete with other producers in previous years. But this year, it began to reduce prices to promote sales on its own initiative, in an effort to reduce its high stock level and cope with the sluggish home appliance market. So you can easily discover that most downstream home electronics producers, even the leading ones, are having a hard time now.

Asian Metal:What do you think of the price trend of non-grain oriented electrical steel in Q4?

Chen: The price is likely to go down further in Q4, but I think the downward price trend will abate gradually. Though downstream demand is likely to remain weak for some time, raw material prices have demonstrated signals of stabilizing. Moreover, leading producers’ ex-factory prices for October and November delivery have been stable for 2 consecutive months. Furthermore, they will usually overhaul their production lines during Q4 after running them day and night for three quarters. Therefore, the oversupply is likely to be alleviated to some extent. I predict that the bottom price for 50A1300 will be RMB2,700/t (USD426/t) within year.

Asian Metal:Leading non-grain oriented electrical steel producers will announce their ex-factory prices every month. But I noticed that actual transaction prices in the market are usually much lower than prices given by steel producers. Could you explain to us the reason?

Chen: Non-grain oriented electrical steel producers will give some subsidies to traders according to their purchasing volume. As a trader, the more he orders, the higher subsidies he can get from a producer. In addition, steel producers will intentionally to give higher list prices than the actual market transaction prices. In this way, traders can enjoy more freedom to negotiate with end users for the selling price.

Asian Metal:How is the business condition of local non-grain oriented electrical steel traders? What about the current profit margin of non-grain oriented electrical steel?

Chen: If you look at our market, the market in Foshan, you will find out that many non-grain oriented electrical steel trading companies have closed this year. Their profit margin is just too narrow to support their business. The average net profit margin for non-grain oriented electrical steel was RMB200-300/t (USD32-47/t) in former years. But now only successful traders can manage to get a profit of RMB100/t (USD16/t) and the profit margin is only RMB40-50/t (USD6-8/t) for most non-grain oriented electrical steel traders.

Asian Metal:As far as I know, traders in past years usually order products from steel mills every month. Their inventories and purchasing quantities were usually quite stable. But it seems that traders now are more flexible in running their business. Many traders stop ordering from producers on a monthly basis. Some even don’t hold any stocks. Could you talk about this?

Chen: The non-grain oriented electrical steel industry was relatively better in past years, so producers require traders to place orders with them every month, since only in this way can traders get the subsidies from them. However, the market situation worsens gradually with the lapse of time, and producers have to relax their requirements on traders.

As for traders, they found out now it is too risky to hold many stocks since non-grain oriented electrical steel prices have been on the downward trend since the beginning of this year. To avoid potential losses, they are very cautious about placing orders with steel mills and holding regular stocks. In addition, banks in China are unwilling to lend money to steel traders, so many of them are suffering a tight capital chain. Some traders are short of funds and incapable of holding as many materials as they did in previous years.

Asian Metal: How is the production of non-grain oriented electrical steel in China? What about the production from major domestic producers?

Chen: The oversupply is a serious problem, which means that the production from major producers stays on a high level. I have the production data in July. The total production of non-grain oriented electrical steel was 754,000 tons in July, increasing by 0.9% month-on-month. The production from domestic producers is as follows: 98,000 tons from Baosteel; 115,000 tons from WISCO; 58,000 tons from Ansteel; 70,000 from TISCO; 65,000 from Shougang Steel. Though I haven’t got the data in August and September, I think the production in past two months was not less than that in July. Silicon steel prices have decreased to the record low, but I haven’t noticed obvious signs of production reduction.

Asian Metal: According to my understanding, the silicon steel market has been running quite slowly in recent two years, but there are still some producers who introduce new production lines and exasperate the oversupply. How do you think of this phenomenon?

Chen: As you know, most electrical producers are state owned ones. For state enterprises, it will usually take 3-4 years for a new non-grain oriented electrical steel production line to be put into production after being approved by State-owned Assets Supervision and Administration Commission (SASAC). The truth is that non-grain oriented electrical steel producers have started to apply for the introduction of production lines as early as 2011 or 2012, when the electrical steel industry was relatively promising. While, after new lines have been put into production in recent two years, the non-grain oriented electrical steel market has already become saturated.

Asian Metal: I discovered that some traders also do some deep processing of non-grain oriented electrical steel at this moment. Do you think it is effective to deal with the current sluggish market?

Chen: Our company also deals with deep processing of non-grain oriented electrical steel at this moment. For example, we can manage the basic slitting and cutting. It can help the sales of non-grain oriented electrical steel to some extent. Buyers have different requirements for the width and shape of non-grain oriented electrical steel coil, so we do the further processing to satisfy their needs better. But I believe that improving the efficiency and saving costs are more effective in coping with the current sluggish market. That is what we are doing to survive in the current market.