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Coaltrans China - Coal, coke and steel - Threads of connections in the supply chain

The oversupply and shrinking demand have caused continuous loss to coking coal producers. Market participants at the 12th Coaltrans China Conference hoped that the revival of the export market may push up the coking price, however, they were disappointed.

Working alongside an oversupplied market

 

The oversupply and shrinking demand have caused continuous loss to coking coal producers. Market participants at the 12th Coaltrans China Conference hoped that the revival of the export market may push up the coking price, however, they were disappointed.

 

"If you cannot find yourself a place in this 500 million tons of market, you have to make your choice - the market is now for the survival of the fittest." said Cui Pijiang, President of China Coking Industry Association (CCIA) who spoke at the Conference held in Shanghai.

 

According to the statistics from CCIA, although the industry as a whole has made nominal profit last year, the profit margin is far below the industry average. Close to 40% of the coking coal producers are suffering from profits deficit in 2013, which amounted to Rmb1.77 billion. However, the production of the coking industry has exceeded 600 million tons in 2013, even though the number of companies reduced from 1,400 in 2004 to 780 in 2012.

 

"The growth of domestic demand is slowing down. Unless oversupply is curbed, market volatility will become a normality going forward," Cui added.

 

While in the international market the Chinese government exempted the 40% export tax in an effort to increase the competitiveness of Chinese coke, it did bring about 4.673 million tons of coke exports in 2013, which is 4.6 times larger than that of 2012. Nonetheless, the growth in export quantity did not in any way push up the coke price.

 

“Because of the limited coke demand in the international market and the drop in coking coal price, the export price is not rising proportionately," Cui explained.

 

The truth is that the average export price of coke has seen a year-on-year drop of 45% to the current US$243/ton. The quantity of the coke export only accounts for less than 1% of the total production.

 

Major challenges facing the industry are obviously the cost. After costs in energy, logistics, financing and salary are deducted, the average profit margin of coking companies was only at 1.34%. Other factors include excessive number of outdated production facilities and growing pressure from the environment legislation which raised the emission standard for production plants.

 

Correlation and outlook of China’s coal and steel market

 

Speakers at the 12th Coaltrans China Conference shared contrasting views on the connection between China's coal and steel market, but it is generally believed that the profit margin of the industry will remain at a very low level in the next few years.

 

"China's steel industry is likely to reach its peak around 2020. The demand will keep growing before then," said Shi Hongwei, Director-General of the Research Center for Metallurgic Industry Economic Development and a speaker at the Conference.

 

Shi’s statement is backed by his figures, which show that the proportion of China's third industry (tertiary industry) exceed the secondary industry for the first time. Additionally, China’s steel consumption per capita has reached 535kg, which is more than double the amount of the world's average level.

 

"It means that China has in general completed industrialisation in 2012," said Shi.

 

Speaking at the same session, Jia Liangqun, Vice President of My Steel.com was also of the view that the "industry peak" has already arrived "without us having been aware of it".

 

"Fixed asset investment is the key driving force for steel, hence for coal and coke," Jia said.

 

His reasoning is based on the research which found a strong connection with the real estate sector. Real estate investment accounts for 35% of the coal and steel consumption. However, investment in rail only has a share of 7.5%.

 

He said that even though the government has issued stimulus packages since 2009 to push the expansion of the steel market in northern and western China, the prosperous property market in the southern and eastern region has forced the demand to move back to the coastal region.

 

"It is market-driven, instead of policy driven," he added.

 

As the fixed assets and infrastructure investment slows down gradually, the steel makers will have to face a challenge. "Growth in fixed assets investment in 2014 will reach the lowest point in the past decade. The steel industry will see its profit margin remain at a very low level going forward," according to Jia’s estimation. 

 

There are still opportunities. Despite the sales pressure, steel makers could in turn create a more flexible and diverse pricing strategy.

This content is provided by Coaltrans Conferences for informational purposes only, and it reflects the market and industry conditions and presenter’s opinions and affiliations available at the time of the presentation.

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