China's steel industry a window for investment

China's steel industry has finally reached technical maturity, and it is a good time to invest in the industry, an official with the National Development and Reform Commission said at the 2007 China Steel Industry Investment Forum held over the weekend in Shanghai.

"Technical upgrades now allow steel mills to shorten the period of time required for project construction to less than a year, instead of the previous two to three years," Jia Yinsong, a senior official at the NDRC's Economic Operation Bureau, said.

Listing on the stock market is a good way for steelmakers to raise funds for projects aside from applying for bank loans. Possible steel product futures trading will also aid steelmakers in cash flow management, according to Jia.

"Technical upgrades and an improved market is resulting in optimized industry structure, and in order to aid this optimization, China's steel industry investment will focus on the upstream sector, the downstream sector and R & D, and particularly on raw materials, fuel, transport, processing, distribution, product development, deep processing, technical upgrades and venture capital investment, which also make up part of the Chinese government's plan to reduce energy consumption by 20 percent and to reduce pollution emissions 10 percent by 2010," Jia said

Restructuring, mergers and consolidation projects will allow the Chinese steelmaking industry to optimize capital employment and stabilize resource supplies. Some notable examples of this include Baoshan Iron and Steel Group (Baosteel Group)'s takeover of Bayi Steel, their joint project with Hangang and their partnership with Baotou Steel Group, as well as CITIC Pacific's various acquisitions in China.

In addition, China's ongoing urbanization and industrialization will further support the domestic steel industry, Jia said.

China's fixed-asset investment amounted to RMB 5.42 trillion ($716.95 billion) in the first half of this year, up 25.9 percent from the same period last year, among which the steelmaking industry featured a fixed investment growth of 9.6 percent to RMB 109.29 billion ($14.46 billion).

According to Frank Gong, managing director at JP Morgan, the Chinese economy is very resilient to the risk posed by the slowdown of the U.S economy, and despite a series policy tightening moves, the Chinese economy has continued to boom, partly boosted by accelerating exports and strong growth in fixed-asset investments.

"The growth in China's economy should continue to support the commodities market. We expect coal, steel and gold to perform well, as raw materials, including steel and coal, are mainly consumed in China and other Asian countries like India, rather than in the United States," Gong added.

However, despite the steel price rally from the middle of 2006, China continues to under-invest in the steel industry, making these sectors even more attractive in terms of a supply-demand outlook.

Iron ore supply will continue to be tight next year, and that will only boost the price of iron ore and steel products, Gong added.

Though China's steel industry consolidation has just begun, industrial consolidation will significantly increase the bargaining power of domestic steel mills in the international market, he said.

Zheng Dong, vice president of the research institute at Guoxin Securities in Beijing, said China's steel demand growth rate for this year would exceed the previous prediction of 15 percent, while the supply growth rate will be around 12 percent, as the country expedites the elimination of outdated steel capacities, suggesting robust demand throughout the year.

"Furthermore, global market demand growth will still rely on Chinese steel product exports this year. China's controlling policies have pushed up export prices and resulted in the increased price of international steel products, which will in turn cause domestic steel products to increase in the remaining months of this year," he said.

As a result, major listed steel mills, including Baosteel, Angang, WISCO and TISCO Stainless Steel, are expected to reap outstanding revenues this year, Zheng added.

Chi Jingdong, vice director at the Science and Technology Department of the China Iron and Steel Association, stressed that China's steel industry should focus on product portfolio optimization and quality improvement.

China's steel industry currently still focuses on wire, which took up a 55.05 percent share of steel production in 2006, down 6.38 percentage points from the previous year.

However, China has shown a recent trend of increasing plate production, despite there still being a large price difference between China's exported products and imported products. China imported 18.51 million tons of steel products last year, at an average price of $1,071.2 per ton, while the country exported 43.01 million tons of steel products, at an average price of $461.0 per ton.