August 25,2009

Steel, Aluminum Prices Plummet; Production Surpluses Growing

By CSC staff, Shanghai

It took 17 weeks this year for the domestic steel price to increase from 3,000 yuan per ton to 5,000 yuan, but less than 2 weeks for it to drop from 5,000 yuan to below 4,000 yuan.

 

>Just as with the rise in late July and early August, the fall in the domestic steel price market over the past two weeks caught everyone by surprise. Early August steel production hit a record high, and the future trend of the steel market is fraught with uncertainty.

 

From April to early August, the prices of main steel products in the domestic market rose nearly 30% over the lowest level this year. As of last weekend, the benchmark steel price index (SH-CSPI) of Steel House (China) closed at 99.12 points, down 5.29% compared with the previous week, 22.51% from the same month last year, and 25.52% from last year.

 

According to a survey by steel information agency "My iron and steel," concerning the domestic steel market trend this week (August 24 ~ August 28) for traders and steel mills in 15 major cities, the prices of deformed steel bars and hot-rolled products are mainly decreasing or adjusting.

 

The rising production capacity has been due to rapid price increases, which have made life very uncomfortable for downstream firms. In early August, the average daily crude steel output of large and medium-sized smelters nationwide reached 1.67 million tons, greater than July's 1.63 million ton total, already a record high. At the moment, most of China's steel mills are at or nearing full capacity.

 

Major aluminum manufacturers, on the other hand, have adopted a painful inventory reduction strategy in response to overcapacity while the government supports aluminum prices through purchasing and storage. Chinalco, China's largest aluminum producer, is still looking at huge losses, however.

 

Chinalco's half-year report states that, due to low prices for alumina, electrolytic aluminum, and aluminum, the company's operating income was 27.985 billion yuan in the first half of 2009, off 29.44%, or 11.678 billion yuan, from the 39.663 billion yuan of the same period last year, and profit fell even more sharply. The first half losses to shareholders of the parent company reached ?47.11%, 3.522 billion yuan down compared with the profit of 2.394 billion yuan over the same period last year.

 

This year, the alumina price continued last year's downward trend, hovering at low levels. By the end of June, the global production rate of alumina was 78%, while in China it was only 67%. In the first half year the world's output and consumption of alumina were 35.51 million tons and 34.23 million tons, down 10.2% and 12.2%, year-on-year. China's alumina output was 10.62 million tons, down 4.6%, imported volume was 2.68 million tons, up 12.1%, and demand volume was 11.41 million tons, down 15.4%, all year-on-year.

 

Chinalco has been hit harder than aluminum companies in other countries. By the end of June, the production rate of alumina for Chinalco was only 66.9%, and that of electrolytic aluminum was 83.4%, reflecting the sharp output drop of main products.

 

Chinalco is working hard now to digest inventory. By the end of June, its reserve stock had fallen by 2 billion yuan compared with the beginning of year. During the first half,  the production of alumina, chemical alumina, primary aluminum, and processed products reached 3.2 million tons, 0.49 million tons, 1.61 million tons and 19 million tons, down 31.6% and 12.7%, and up 5.9% and 110.1%, respectively.

 

The second quarter's performance was better than the first quarter's, due mainly to the economic stimulus policies and the pick up of the economy. Aluminum prices gradually rebounded a bit and aluminum futures in March reached $1700/ton on the London Metal Exchange.

 

This year, domestic aluminum prices have fluctuated between 12,000 and 15,000 yuan/ton, but the break-even price for most domestic producers is 14,000 yuan/ton. The government is not likely to purchase and store more aluminum beyond 12,000 yuan/ton. The current domestic capacity utilization rate is 75%, while the lowest was 57%. More producers will resume production when the price exceeds the breakeven cost of 14,000 yuan, and the greater supply will restrain the domestic price trend.

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