May 19, 2021

Raw Material Markets in China - Short Supply, High Prices Expected to Continue

000709 CH, 002075 CH, 600019 CH, 600362 CH, 600585 CH
By David Ren
Demand for steel, cement and copper in China is expected to remain elevated through 2021, and high prices are expected to persist as global supply runs short, despite expanding production.
  • Elevated contract volumes driven by infrastructure and residential demand
  • 6 of 7 sources expect high prices to continue through year-end because of supply shortages stemming from China-Australia
  • Government policies, industry consolidation benefiting large, efficient producers such as Baoshan Iron & Steel (600019 CH), Anhui Conch Cement (600585 CH) and Jiangxi Copper (600362 CH)

Strong Demand Projected Through Year-end

End Markets Driving Material Orders
(number of mentions)
Infrastructure projects5
Residential construction3
Automotive2
Healthcare2
Industrial construction2
Commercial construction1
Manufacturing1
Power generation1
Power transmission and distribution1
Other1

Six of seven Chinese sources said demand for steel, cement and copper improved qq during the past 90 days because of recovery in the Chinese economy, increasing material prices and strong end-market demand. In line with OTR Global’s March 22 China Heavy Equipment Manufacturers report, infrastructure projects were most frequently mentioned as a demand driver. Sources also said residential construction is boosting demand, especially in large cities. “Market demand was mainly driven by infrastructure projects and residential construction. Housing construction still has the most demand for cement,” a cement producer said. Automotive, industrial and healthcare markets were also active.

Five of seven sources said the total dollar volume of their material contracts increased yy during the past 90 days, and expect that trend to continue through 2021. “Judging from the current trend, this year’s output and sales volume will be a leap over last year’s,” a steel producer said. Another source said, “The total dollar volume of materials contracts has increased 70% during the past 90 days [yy] because of strong steel prices and continued demand improvement.”

Production Plays Catch Up
With materials contract volumes expected to increase, five of seven sources said production has increased yy during the past 90 days and expect similar trends during 2021. “Our materials production in 2021 may increase 10%-15% yy because of strong prices, better demand and high capacity utilization,” a source said. Responding sources reported high capacity utilization rates, ranging from 80%-95%. “Capacity utilization rates of blast furnaces at steel mills across China jumped to 90% recently. … Our current capacity utilization rate is also about 90%, and the monthly output can reach about 320,000 metric tons,” a steel producer said.

Several sources said they expect production to continue to expand during the next year. “From now on, the total output of the steel industry will certainly increase. Because the pressure for national environmental protection is gradually increasing, [non-compliant] production capacity will be eliminated. But, the market demand will increase, which will inevitably stimulate advanced enterprises to expand production capacity,” a steel producer said.

China-Australia Tensions Increase Supply Concerns
Even with production expansions, sources said supply of many materials is running tighter.  Several said strained relations between China and Australia have amplified supply concerns for coal, iron ore and precious metals. (Roughly 60% of China’s iron ore imports were from Australia in 2020). “At present, we mainly import iron ore from Australia and Brazil. We may adjust the proportion in the future,” a steel producer said. Another source said, “Recently, because of political tensions between China and Australia, China may decrease material imports from Australia next year.”

With demand booming and a major source of materials absent, sources said China is seeking diversified suppliers of raw materials to avoid risks and ensure supply. However, several said a rally in materials prices made imports less appealing. “China’s copper resources are not sufficient in response to market demand, representing 3% of overall global resources. China still needs to import from Chile, Australia, Peru and Russia,” a copper producer said.

Price Increases Expected to Persist
Steel and copper producers said robust demand, rising raw material costs and supply concerns -- as well as inflation fears -- drove prices to record highs. “During the past three months, the price of steel has been rising, especially in May. Steel prices have increased to more than 5,500 yuan per metric ton in May, compared with 3,500 yuan per metric ton [a year ago],” a steel producer said. A copper producer said, “Copper prices have climbed to the highest levels during the past 10 years. Copper prices reached more than 73,000 yuan per metric ton recently, up more than 100% from 35,000 yuan last March.” Cement producers reported smaller increases. “As market demand remains good this year and the prices of all kinds of materials are going up, I expect cement prices to be higher [yy].” Sources said increasing prices are fueling producer profitability despite high input costs.

Six of seven sources expect pricing to remain elevated throughout 2021, driven by global shortages. “Copper prices have increased significantly [yy] during 2021 to date because of tight global supply in South America and other places. We expect the copper prices to continue an upward trend during the next few months because of global supply shortages,” a copper producer said.

Government Policies, Industry Consolidation Benefit Large Producers
Sources said the largest producers appear to be best positioned, with Baoshan Iron & Steel Co. Ltd. (600019 CH) mentioned most often for steel, Anhui Conch Cement Co. Ltd. (600585 CH) for cement and Jiangxi Copper Co. Ltd. (600362 CH) for copper. “In the steel industry, Baoshan Iron & Steel is still the largest one in China. Its scale advantage and sales network will help maintain a good market position during the next 12 months,” one source said.

Sources said the Chinese government’s multi-year push to consolidate less efficient or environmentally unfriendly producers has waned as the more important near term priority is to boost China’s economy, which has been disrupted by the pandemic. However, sources expect the government to resume greater industry consolidation once the economy returns to a normal level. “I think it will take at least two to three years before the government resumes the push toward greater industry consolidation. The economy was hurt by the pandemic. It needs time to recover,” one said.

Most sources expect the government’s policies and regulations to have a positive impact on their business during the next three to five years. “In the next three to five years, the government’s policies and regulations will be helpful for China’s economy and will help our business as well. In addition, industry consolidation will help ease oversupply, and our large producers will benefit from the trend, as it will push out small players. … We are already upgrading internally and will certainly have a place in the future competition,” one said.

ADDITIONAL QUOTES
“Dollar volume has increased more than 80% during the past 90 days [yy] and net profits have increased more year-to-year because of strong copper prices.”

“Because of the large-scale promotion of the new vaccine, the pandemic in the international community will be stable, which will inevitably lead to a strong recovery of the international market.”

“The total dollar volume of material supply contracts in 2021 may increase 20% [yy] because of China’s improving economy, better downstream demand and strong copper prices.”   

“With the stabilization of the pandemic and the improvement of domestic and international markets, the supply contracts of iron and steel in 2021 is likely to increase [yy]. Steel prices are the highest since 2008.”

“We think the strong demand will continue to drive up our steel production throughout 2021. Our steel production will increase 10% [yy].”

“We are running almost at our maximum capacity. We have the capacity to produce 200,000 metric tons of copper in our own copper mines. As copper production was negatively impacted by the pandemic last year, copper production has increased during the past 90 days [yy].”   

“With the stabilization of the pandemic in North America and Europe, it will inevitably lead to a surge in international demand, which will stimulate domestic production and lead to a surge in production.”    

“With the reform of the supply and demand structure of the national iron and steel industry and the implementation of the de-capacity policy, it is expected total steel output will increase steadily in one year, but not too much.”    

“With the start of a large number of domestic downstream industries and the strong recovery of the international market, material prices will continue to rise.”

“Baosteel, Hesteel Co. Ltd. [000709 CH] and Jiangsu Shagang Co. Ltd. [002075 CH] are expected to be in the best position in the next 12 months. This is determined by their strong comprehensive strength, including technology, R&D power and production capacity.”

“If the government has stricter environment control policies, it will definitely have negative impact on us as we will have to hold production and upgrade our equipment.”

“The government’s efforts to promote industry consolidation will have a positive impact, such as steady increase in production capacity, more reasonable product structure, increased research and development of new products, and enhanced competitiveness in the international market.”

“The priority of the government goal is to boost China’s economy. I think industry consolidation has shown some positive signs during the past few years and the government may continue to push the consolidation when the economy is back to normal. This may not happen this year.”