What was the worst decline in 2015?

The answer is the price of steel, perhaps you would say, no, it should be stocks. But stocks surged before mid to late June, and even after experiencing a catastrophic stock disaster, as long as you haven't leveraged and entered the market early, at least there won't be too much loss now. But steel is different. Below is the weekly K trend chart of the Shanghai Futures Exchange rebar RB1511 contract (abbreviated), which is a trend that never returns, making people despair.

Recently, there have been reports that the price per kilogram of steel is lower than that of cabbage. The above picture can prove that 'this statement is true'. As of September 30th, the contract price for deformed steel bars expiring in November 2015 is 1750 yuan per ton, equivalent to 0.875 yuan per kilogram. And the week before National Day, the steel contracts of the Shanghai Futures Exchange showed an accelerating decline trend.

What is the concept of 1750 yuan per ton?

In 1993, during the first foam period of real estate, the rebar cost 3000 yuan per ton (think of the purchasing power of RMB at that time). Later, after undergoing governance and rectification, as well as the Asian financial crisis, the price of deformed steel bars continued to decline, reaching around 2200 yuan per ton in 1999. The historical peak of 'surface price' occurred in the first half of 2008, when it was around 5500 yuan per ton.

I have calculated the "real inflation rate" of China over the years since 1999 according to "M2 minus GDP growth rate of broad money". The conclusion is that the current purchasing power of 100 yuan is only a quarter of what it was in 1999. Based on this calculation, the current real price of threaded steel is equivalent to one-fifth of that in 1999! Even in 2008, when the "surface price" of threaded steel was the highest, its "real price" still did not exceed that of the bear market in 1999, let alone 1993.

In short, steel prices have generally declined over the past 22 years. However, the decline has been even greater since 2008!

Why is there such a tragic trend of decline in steel prices?

The primary reason is the unlimited expansion of production capacity.

I have analyzed in previous articles that from the growth rate of broad money M2 (commonly known as "money printing speed" by ordinary people (603883, Guba)), China has been basically stimulated by loose monetary policy for more than 30 years. In times of economic downturn, such as 2009, the M2 growth rate can reach an astonishing 27.7%. The simplest way to stimulate the economy is to establish a "iron public foundation" and stimulate the real estate market, which will lead to an expansion of steel demand and a profit making effect. So, various regions are vying for steel projects. Wave after wave, sometimes it's difficult for the central government to control.

Moreover, China's steel enterprises also have a characteristic that they are often state-owned enterprises, less sensitive to profits and losses, but closely related to the local government's achievements and GDP. So, even if it's a loss, we still need to go to projects and expand production capacity.

There was a joke about China's steel production capacity: China participated in the world steel production ranking, and the result was: the first place was China (excluding Hebei), the second place was Hebei (excluding Tangshan), the third place was Tangshan (excluding hidden reports), and then the United States, Japan, and so on.

Data shows that by the end of 2014, China's crude steel production capacity had reached 1.16 billion tons. If China were willing, we could produce 70% of the global steel! In fact, in 2014, China's crude steel production was 9 times that of the United States and 4.8 times that of the 28 EU countries combined! According to media reports, even if China does not produce steel in the next few years, relying solely on inventory will suffice.

Contrary to overcapacity and a surge in inventory, the growth rate of downstream steel industries, represented by real estate, has slowed down in the past, while investment in stable growth construction such as "Tiegongji" has not been implemented, resulting in a decrease in steel demand. According to the data of the National Bureau of Statistics, from January to August, the national fixed assets investment (excluding farmers) increased by 10.9% year on year, 0.3 percentage points lower than that from January to July, and 5.6 percentage points lower than that of the same period last year; The national real estate development investment increased by 3.5% year-on-year, a decrease of 0.8 percentage points from January to July, and a decrease of 9.7 percentage points from the same period last year. The newly constructed area of houses decreased by 16.8% year-on-year, while the land acquisition area of real estate development enterprises decreased by 32.1% year-on-year; In August, the added value of industries above designated size nationwide increased by 6.1% year-on-year, an increase of 0.1 percentage points compared to July, and a decrease of 0.8 percentage points compared to the same period last year; The apparent consumption of crude steel nationwide is 477.48 million tons, a year-on-year decrease of 27.66 million tons, a decrease of 5.5%, an increase of 2.2 percentage points compared to the decrease in 2014, and a 3.5 percentage point increase compared to the decrease in crude steel production. Overall, the macroeconomic situation in August was under downward pressure, and the demand for steel in the market decreased.

In addition, market competition is becoming increasingly fierce, and there is a vicious price war between steel enterprises and steel traders to ensure market share. The phenomenon of steel prices falling continuously, and the overall loss range of the steel industry has expanded. The profit per ton of steel for large and medium-sized steel enterprises has increased from a loss of 18 yuan last year to 50 yuan/ton. And overcapacity is no longer just about low-end products, but most relatively high-end products also face serious overcapacity issues. According to statistics from the Steel Association, from January to July, the steel settlement price of steel enterprises decreased by 756 yuan/ton year-on-year, a decrease of 28.38%. At the end of August, compared to the end of last year, the average prices of major steel varieties decreased by 797 yuan per ton for steel bars and 904 yuan per ton for wire rods, 1197 yuan per ton for hot-rolled coils, and 1346 yuan and 1369 yuan per ton for high-end cold-rolled and galvanized sheets, respectively. In the first half of the year, the growth rate of main business income of multiple listed steel companies was negative, with Jiuquan Iron and Steel Hongxing experiencing the largest decrease, a year-on-year decrease of 37.99%; The overall sales revenue of large and medium-sized steel enterprises reported was 1.14 trillion yuan, a year-on-year decrease of 18.2%; The main business income of steel enterprises has declined throughout the entire line, and the production and operation situation is very severe.

In terms of raw materials, with the decrease in domestic steel demand, the demand for iron ore by steel companies has also decreased synchronously, and the iron ore market has exceeded demand. The three major foreign mines have utilized their ultra-low cost advantages to expand production against the market and occupy the Chinese market, resulting in China's dependence on imported iron ore exceeding 80%. At the beginning of last year, the price of imported iron ore was 133 US dollars per ton, and it is gradually stabilizing at around 55 US dollars per ton. The decrease in imported iron ore prices has also led to the loss of significant cost support for steel prices. The US dollar is about to enter a cycle of interest rate hikes, which will bring about a plunge in commodity prices and a difficult period for steel prices to recover.

What risks will the sharp drop in steel prices bring?

Although the country has actively introduced policies such as the "the Belt and Road" to help China's steel industry go global in order to alleviate the situation of domestic steel surplus, the "the Belt and Road" is a process of gradual implementation, closely related to international geopolitics, and far from satisfying the thirst.

So with the sharp drop in steel prices, what risks will the steel industry face?

1. The financial risks of steel trading enterprises are prominent, and more steel enterprises will experience capital chain disruptions, resulting in a large number of debt defaults. There is a slight easing of the steel trade crisis, and there is a risk of another outbreak.

2. Industries closely related to steel, such as coal, cement, glass, and other industries, are also experiencing overcapacity, and a large number of enterprises will be eliminated. Upstream of the steel industry, iron ore manufacturers will also suffer in the cold winter.

3. Private enterprises in steel production enterprises, due to the tightening of funds in the steel trade field by banks and the lack of any organization willing to provide free blood transfusion for private steel enterprises, will have even more difficult times because you cannot afford to lose to state-owned enterprises. The result is the advancement of the country and the retreat of the people in this field.

4. Due to the steel price falling below the cost line, the shutdown and maintenance of steel enterprises will become more frequent, and the number of small and micro steel enterprises that will go bankrupt will increase day by day. A large number of steel workers are likely to lose their jobs. This type of phenomenon is occurring in provinces and cities such as Shanxi, Shandong, and Hebei.