According to the latest statistics from the China Iron and Steel Association, the total profit of China’s major large and medium-sized iron and steel enterprises in April was further reduced to ¥ 1.79 billion (Yuan), compared with ¥ 2.084 billion in March, and a decrease of 96.65% from 2011.
The statistics also indicate that in April, the major large and medium-sized steel enterprises generated ¥316.66 billion in sales of products, down by 0.8% year on year; the total loss of the 17 loss-making enterprises was (¥1.96 billion), with a year-on-year increase of ¥31.98 million.
In the first two months of this year, the major large and medium-sized enterprises suffered overall losses and began to return to meager profitability in March. However in May, the steel prices accelerated their decline, which pushed steel enterprises into business difficulties again.
This year, the fall of steel prices is closely related to the large-scale production of crude steel, but it’s not the dominant factor. In addition to the fall of steel prices, a primary cause is the loss of market confidence resulting from global economic woes, notably Europe’s debt crisis. If the euro zone is unable to come to grips with this crisis, there may be further weakening of global demand. In the first four months of this year, the crude steel output grew by less than 2%, yet steel prices fell sharply.
Another reason for lagging results is that the Chinese economy is slowing, potentially resulting in a “hard landing.” Export is one of the cornerstones for China’s economic growth, with Europe accounting for some one-third of global export demand. China’s export trade has fallen sharply. The year-on-year growth rate of exports in April was only 4.9%, 25 points lower than the same period of last year, down by 1.6% month on month.
A third reason is that the US dollar is depreciating as a hedge. Threats that the Euro area may possibly disintegrate and the euro may become “waste paper” will cause a significant migration to the US Dollar as a safe-haven, meaning a rise in the exchange rate of US dollars. In June 1, the yield of 10-year US treasury bonds fell to below 1.5% for the first time, the lowest point on record. It is anticipated that the yield of US treasury bonds will continue to go down.
The above-mentioned factors all hang over the current raw material market including steel and iron ore. The main driver at present is Europe’s debt crisis, from which the latter three are derived. It is difficult to remove these factors in short time, so the recession of the raw material market such as steel and iron ore cannot be easily reversed in a short run.
However, along with this pessimism, some favorable factors are gradually accumulating that to a certain extent, will encourage a rebound of steel prices. Countries in the world are becoming aware that overly harsh “austerity” measures such as sharply reduced government spending and increasing taxes are not the answer to a lack of growth.
There must also be pro-business measures including reduced regulatory burdens and reform of labor rules to encourage hiring. These steps could lead to steady growth and economic stimulation. The Federal Reserve may also start measures to depreciate the US dollar, such as launching “QE3” (the third round of quantitative easing), which will help support commodity prices, including those of raw materials such as iron, steel, and iron ore.