Downstream demand for flat steel to be sluggish in 2019

Asian Metal: Good afternoon, Mr. Lin. Thanks a lot for agreeing to the interview. Please could you briefly tell us about your company?

Mr. Lin: Ok. Zhongyi Mineral (Shanghai) Co., Ltd. involves in both steel sales and machining. For sales, we are the agent of Bengang Steel, and also deal with materials from Ansteel, Shagang Steel and Rizhao Steel. Main products are HRC and section steel, with monthly trading volumes of 6,000t and 2,000t each.

For the machining, we own advanced equipments such as imported laser cutting machine, CNC bending machine, CNC shearing machine, large punching machine, CNC brick tower punching machine, CNC plasma underwater cutting machine and welding robot and so on.

Asian Metal: Where are your materials sold? How about customers?

Mr. Lin: Materials from our company are mainly sold to Shanghai, Jiangsu and Zhejiang. Therein, end users and customers occupy 50% each.

Asian Metal: The central government announced the decision on 15 March to cut the VAT rate by 3 percent to 13 percent from 1 April. Traders in major Chinese domestic markets are inactive in concluding deals and raise prices in succession boosted by the news. What do you think of this situation?

Mr. Lin: The government means to ease the burden of enterprises and release capital liquidity. Personally, I'm not so confident of the market prospect in April. Therefore, we should respond rationally and it is not wise to hold back sales blindly.

Firstly, sales data from automobile and home appliance parts, the two major downstream industries for flat steel, dropped sharply recently, and that's why the government is active in supporting relevant industries. However, it is hard for the downstream demand to get stronger since the current market is almost saturated. Secondly, if traders hold back sales this month, the market inventory pressure will be heightened in April. Lastly, the capital flow will be tight if traders refuse to sell products.

Asian Metal: Major HRC producers have been inactive in producing from early March, either suspending production lines or slowing down production. How about the delivery to Shanghai recently? Has the market inventory witnessed obvious decrease?

Mr. Lin: Yes, mills such as Bengang Steel, Tonggang Group, WISCO and Jingtang Steel indeed slowed down production recently, and the supply for HRC was cut. Besides, the peak season for construction projects arrives with the weather getting warmer, while the demand for flat steel from remains insufficient, partly explained why mills prefer to guarantee the full production of construction steel and slow down that for HRC.

As far as I learnt, the delivery to Shanghai was reduced recently, and the overall market inventory of HRC decreased by nearly 2% WOW.

Asian Metal: Baffled by the significant decline in sales of automobile and home appliance in 2018, the government endeavored to support relevant industries and launched stimulant policies such as the second round of "home appliances to the countryside" and "cars to the countryside". How do you think the downstream demand this year?

Mr. Lin: As the second pillar industry of the country, the automobile industry has experienced a sharp decline in production and sales since 2018, and it is reasonable that the government releases policies to support it. However, as I mentioned before, I'm not so optimistic about the market prospect this year. On the one hand, the domestic auto market is becoming saturated, while on the other hand, the unstable external environment has blocked exports in recent two or three years, and the domestic sales pressures are heightened.

Asian Metal: The price for HRC witnessed a total markdown of about RMB600/t (USD90/t) in 2018. To specify, it dropped by about RMB400/t (USD60/t) in the first quarter, and rebounded obviously in the second and third quarters, but declined again in November dragged by the weak downstream demand as well as the overdraft of the pollution curbs. How do you think of the price trend in 2019?

Mr. Lin: I do not think the price for HRC will change obviously this year, and it is likely to fluctuate with small margins. As a trader, I tend to be rational and control the stock within a safety level.

In the meantime, though the pollution curbs continue, the output for major steel products are increasing, which can be seen from the crude steel production data announced by China Iron & Steel Association (CISA). In the meantime, the downstream demand fails to improve, which means the situation will be similar with that in 2018.

Asian Metal: What about your development plan in next few years?

Mr. Lin: We plan to carry out metal mining business in next few years, and it is still under investigation.

For the main business of steel, we will continue to adhere to the principle of market-oriented and terminal-assisted. At the same time, we will expand sales channels, such as the e-commerce platform and other online sales models.