Analysis of the Three Factors in the Iron and Steel Industry in the Second Quarter

In the first quarter, the production and operation situation of the steel industry was very severe and the sales profit rate was only 0.9%. In the face of the current difficulties, the steel industry must strengthen its confidence in particular, and strive to seize the “One Belt and One Road” strategy, the “Made in China 2025” strategy, the reform dividend, and policy favorable factors to provide a rare opportunity for the development of the industry.

The first quarter is the traditional off-season demand for steel products. As the pressure of economic downturn increases and demand weakens, the steel industry's production and operation situation is very severe. Steel prices fell sharply below the costlines of most steel companies. The Csteel steel composite price index of China Steel Association fell from a record low of 83.09 in early 2015 to a record low of 74.14 in mid-March before it stopped falling and stabilized. In the first quarter, the sales margin of the steel industry was Only 0.9%, significantly lower than the national industrial average of 4.9%. If there are no significant price cuts for imported iron ore, the whole industry may see a zero or even a loss.

Under the background of the Chinese economy entering the new normal, the opportunities and challenges of the steel industry coexist, and the way out is the transformation and upgrading. In the face of current difficulties, the steel industry needs to strengthen its confidence and firmly grasp the development opportunities. It is recommended that the steel industry focus on the following aspects:

The first is the opportunity brought by the "One Belt and One Road" strategy. At present, the "One Belt and One Road" strategy is gradually implemented from the top-level design and planning. For China’s steel industry, the demand for steel trade imports from most countries along the “Belt and Road” route, or the demand for the steel market brought about by its infrastructure construction, and the opportunities for cooperation with steel production capacity in countries along the route are important. Historical opportunities have a great market demand and development space in the long run. The steel industry should actively promote the direct and indirect exports of steel products to countries along the “Belt and Road” and strive to find opportunities to cooperate with the countries in the iron and steel industry where conditions are favorable for the development of the steel industry. Recently, the Sino-Kazakhstan capacity cooperation has made new progress. On March 27, 2015, China Metallurgical Corporation, Masteel Holding Co., Ltd. and Ferrum Corp. signed a memorandum of joint venture company for the Kazakhstan 1 million-ton/year integrated steel plant project, which is a good start.

The second is the opportunities provided by the "Made in China 2025" strategy. This year, "Made in China 2025" has risen as a national strategy. China has promoted the upgrading of manufacturing industries, focusing on the development of high-end CNC machine tools and robots, aerospace equipment, marine engineering equipment and high-tech ships, advanced rail transportation equipment, energy-saving and new energy vehicles, Electric power equipment and other fields put forward higher requirements for the quality of steel products. It is urgent for the steel industry to enhance its innovation capabilities, develop and produce more, higher-tech, higher-performance steel products, and steel products and technology upgrades are just right. The upgrading of the iron and steel industry itself will also be accelerated. For example, smart building, “Internet+”, etc. will enable smart transformation, consolidation and green development.

The third is to make full use of reform dividends and policy favorable factors. 2015 is a crucial year for the implementation of the national deepening reform policy. In particular, deepening the reform of the electric power system will be beneficial to the steel industry. In addition, a series of policy measures promulgated by the State Council are conducive to reducing the burden of the steel industry. For example, the state cuts the average price of industrial and commercial electricity by about 1.8 cents per kilowatt-hour, and estimates that the steel industry will reduce the cost by about 5 billion yuan annually. The state lowers the proportion of iron ore resource tax collection, and collects 40% of the prescribed amount of tax on the basis of 80% of the prescribed tax. The iron ore mining industry can reduce the tax burden by about 9 billion yuan each year. These are conducive to the steel industry to reduce costs and increase efficiency.

Looking into the second quarter, the iron and steel industry will have overcapacity, low prices, and no fundamental change in the low-profit situation. Considering that the second quarter has entered the construction season and the effects of the national pre-adjustment fine-tuning and directional control policies have gradually emerged, it is expected that the economic development index of the China Steel Industry in the second quarter is more likely to improve slightly than in the first quarter.