Stainless Steel Market Summary in China|| Severest Ever! “Reduction League” Formed by Mills

Proposed by ZPSS: Led by Tisco, associating with Chengde Group, Jisco, Baosteel Desheng, Ansteel Lisco, Tsingshan and Delong Steel, the largest reduction in production will be begun from March.

Because of the epidemic outbreak, the stainless steel industry and sales are both impacted significantly and the stainless steel enterprises will face a lack of orders in March as the prediction. Therefore, mills are suggested to reduce production to overcome this difficult time.

Although the stainless steel industry has not wholly operated, we still can the frustration deep in the situation.
However, we shall see the light of hope as every part of the stainless steel industry is starting to coping with it. This is a separate and spontaneous action by different enterprises, but it is a united power against the sudden risk.
In January, mills have had their output shrunk. According to the statistics, in January, the stainless steel output oMo decreased by 300 thousand tons.
By now, the “Reduction League” has been expanded since January.

Anticipated from this reducing trend, the reduction in February will be more than it was predicted, so it is anticipated that the output of steelmaking will continue to fall 300 thousand tons. 
Why did this large-scale production cuts break out? Let’s analyze based on the stainless steel production line.

I Production Enterprises

We interviewed some stainless enterprises. Although the stainless steel market does not open yet, since the first day to work, every enterprise had given an offer to market without any change unconsciously. But looking at the future, all enterprises are holding heavy concern.

1. Warehouse full of Stock

During Spring Festival, the stock of mills usually increases, because there is following a supply vacant time for a month and mills usually lessen outputs. However, this year, the outbreak caught the industry off guard. 

In January, mills managed to ask the trading companies to pick up the goods during the spring festival. But in February, trading companies stopped selling period, which means that the goods are stacked in the warehouses with a quantity of one-month output because mills are still producing in February.
After the Spring Festival, many mills warehouses have been full of stock. It is not made to horrify the market. It is happening. All reduction becomes a must-be-done duty for all mills. 

We calculate that there are 1,220 thousand tons of finished products in stock, which is equivalent to half-month stainless steel output. (If the raw materials of mills do not take into account, the anticipated data will be double.) 

If the price goes down, what will be the stainless steel enterprises facing? We are giving some data. 

2. High Sales Pressure 

Demand increased in December, which overdrew the demands in the latter months, and many downstream customers placed orders in advance because of the low price at that time. The rest demand is postponed because of the epidemic outbreak and there is no way to consider sales. Facing this difficulty, mills choose to reduce production which helps to release inventory and to lighten the stress of the sale. It is a strategy to wait for the demand reviving.  

3. Mills are in Sandwich Status 

Mills are not only facing sales pressure but also facing the difficulty of raw material.
Ferrochrome price is rising, so are silicomanganese. Finding that mills are lack of raw materials, the raw materials sellers take the chance to increase the price. Therefore, ferrochrome is now again back to over 230US$/nickel.

One side is the spreading raw material price, the other side is the dropping final price. It is what mills like, a ham in a sandwich. The reason for large-scale production reduction is that for mills, reducing production is a way against high raw material prices and to maintain the finished product price.

II Trading Enterprises 

Aside from the difficulties of mills, trading enterprises also have their concerns.

1. Loss Both in Futures and Inventory

People in the industry are now in a negative mindset. They are letting it loose. After all, they are hoping that one day, the price will go up as long as the logistics do not open and they do not take delivery. 
Based on the futures orders, like Q mill, from January to February, there are at least 400 thousand tons in the futures order. Therefore, if stainless steel price drops 14US$ per ton, the stainless steel trading enterprises have to lose 5,714,286US$.

2. Inventory is also in the loss

The stainless steel inventory of Wuxi and Foshan is about 700 thousand tons. Every 14US$ drop of a ton, the inventory loss of stainless steel trading companies will reach 10,000,000US$.

Profit and Loss of Trading Enterprises

For trading, most companies are looking forward to a stable price, but how could it be possible? 

We found some special people during the interview. 
In many manufacturing industries, there are many experienced technicians, production line managers and engineers are from Hubei province which is the place of the epidemic breaks out. Hubei is province exporting much labor and it is also a place where there are many colleges. These are the reasons why technicians from Hubei are taking a major part. During this abnormal period, people from Hubei province are restricted to go back to work and the restart for factories is still unknown to all. Judging from this epidemic, it needs at least 2 months, will the whole situation get relived. 

In conclusion, to the revive of downstream demand, we hold a pessimistic opinion. To change supply, which seems to be a more effective way, because the upstream relatively concentrate. 

III A General Ledger for the Entire Industry

To summarize the above data, the possible loss comes from down sided price is shown as below: 

You can find from the above table, 72US$ drop of every ton will arise 166,666,667US$ loss of the entire industry.

IV Will Q mill join the “Reduction League”?

Whether will this league succeed is still unknown. People are concerned: will Q mill join the reduction action?
There are different anticipations about it:

A: I think it is less possible for Q mill to join. First of all, for Q mill, futures have orders arranged for April and May. As for sales, it is of the least pressure. The one who is now facing bankruptcy is the trading company of Q mill and its cooperating clients. As for the clients, as long as the drop of price does not reach over 235US$/ton, the declining percentage is not over 10%, the clients will take out their goods to maintain the cooperation.

B: Q mill plays against D mill from raw materials, hot-rolled stainless steel, and cold-rolled stainless steel. During Spring Festival, D mill never stopped producing cold-rolled stainless steel which will arrive at the market after the holiday and Q mill won't let D mill pass it easily.

What if Q mill does not join the reduction action and let the price drop after the market restart, it is difficult for us to witness the victory of this price protection battle. 

C: We should notice the latest definition of the Contract Law, which may cause certain stress on Q mill. Some experts have given this latest "Analysis of Ordering Situation under Force Majeure in Contract Law":

Regarding the" Notice of the Supreme People's Court on the Executives in the People's Court's Trial and Enforcement Work in the Prevention and Control of Infectious Atypical Pneumonia "(has been abolished but still has reference value) and the relevant provisions of the Contract Law, there are lawyers The team believes that even the outbreak of this epidemic cannot be accurately predicted by professional medical experts. It is unpredictable, unavoidable, and insurmountable. It should be a force majeure stipulated by law (there is also a legal opinion to change the situation).

Therefore, if an enterprise is unable to perform its purchase or sales contract due to administrative measures taken by the government or due to the impact of the epidemic situation, it can be regarded as force majeure in the Contract Law, and the enterprise can legally terminate the contract without bearing any civil liability. "

From the interpretation by the attorney, the Court may agree “Enterprises may not be held liable for the termination of purchase contracts”.
In this circumstance, it is afraid that Q mill has some concern to join the reduction league because terminating most of the contracts is harmful to Q mill.

D: Because of the block of logistics and the maintenance, actually Q mill is reducing production.

V Summary

Chinese are confident to overcome this risk and challenge as long as we always unite and cooperate. Therefore, more and more enterprises gathering together is our hope, to protect the stainless steel industry develop in a sustainable and stable mode and soon the industry will welcome its safe day to go back to work.

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