SHANGHAI The steel price
crash in China that rattled global steel markets earlier this
year exposed just how turbulent Chinas markets can become
when the countrys growth slows and the government
doesnt step in with a credit and investment boost.
It also revealed the chaotic
nature of the countrys steel trade, something that
steelmakers are beginning to address more seriously by changing
the way they work with traders and developing more channels of
their own to sell steel.
Chinas steel market began
to weaken in April and then slumped during the third quarter
amid deepening concerns about a slowdown in economic growth, as
well as a sharp turndown in the construction sector after the
government moved to deflate a property bubble. The bear run
appeared to be exacerbated by the concentration of price risk
in Chinas sprawling and fragmented network of
intermediary steel traders.
A large portion of Chinas
steel distribution and supply chain is made up of small-scale
businesses that place annual margins with steel mills and pay
up to a month in advance for material. But their own customers,
the end-users, mighty pay up to one or two months later and can
even delay or cancel delivery when market prices are falling.
Such a model creates two key problems, which were highlighted
during the recent downturn, sources said.
First, it creates large demand
for bank loans from the trading community. But when the
government tightens official lines of credit, trade is fueled
by unofficial lending, often linked to bundles of steel as
collateral. This worked in a bull market, but when demand and
prices slump and traders struggle to maintain cash flow, it
fuels the downward spiral in spot steel prices.
Second, it means Chinese
steelmakers dont have enough information or incentive to
quickly adjust production.
"Steelmakers, rather than
traders or (distributors), should take the loss of market price
drops so that they will be serious enough to adjust production
in line with real demand and changes in the economic
situation," a major trader in Tianjin told AMM sister
publication Steel First.
As a result, Chinese sources say
significant changes to the system must be made.
Chinese steelmakers will likely
have to adopt practices by Japanese and South Korean peers, a
distributor in Shanghai said. There, mills work more closely
with a smaller group of select traders to regularly adjust and
prepare production level and sales.
Some traders have already quit
the market as they fail to weather the storms of the past 18
months, sources said. Those who remain are looking to push a
new way of cooperation with steelmakers that sees the mills
carry some risk, some said.
"Traders and (distributors) who
survived this first round have already reduced their monthly
contract volumes with steelmakers, beginning early this year,"
another distributor in Shanghai said.
They will book even less from
steelmakers next year, sources said, forcing producers to set
more reasonable or favorable policies for a smaller number of
In addition to rethinking their
relationship with each other, traders and mills are also
mulling more sophisticated ways of supplying steel to
end-users. Traders are setting up more strategic logistics hubs
and coil centers, and mills are establishing bigger sales
networks of their own to bypass traders, sources said.
For example, Xinyu Iron &
Steel Co. Ltd. has been in talks with traders in Shanghai and
Guangdong province to set up cooperative ties on sales to
downstream customers, sources said. Baosteel Group Corp., which
has long sold products direct to customers, has also operated
its own online steel sales service for many years. Likewise,
Rizhao Steel Co. Ltd. has recruited 200 people to make direct
sales to end-users and Hebei Jingye Steel Co. Ltd. is said to
be more active in building a direct sales team.
This is closer to the European
model in which large steelmakers have substantial distribution
networks of their own, but might have its limitations for
"The volume through steelmakers own direct sales
channels may not be large. It will be hard to exceed 10 percent
of total sales volume," a sales manager at Jinxi Iron &
Steel Co. Ltd. said, citing most buyers need for
A version of this article
was first published by AMM sister publication Steel