Development Situation of China's

Steel Industry and Strategic Thinking

on Steel Import and Export in 2007

Executive Vice Secretary-General of China Iron and Steel Association

Chief Analyst, Researcher Qi Xiangdong

April, 2007

Outlines

Ⅰ A good start for China's steel industry in 2007

Ⅱ Analysis of supply and demand situation in

China's iron and steel industry in 2007

Ⅲ Development trend and strategic thinking on

China’s Steel Import and Export

Ⅰ A good start for China's steel industry in 2007

　 In 2007, China's iron and steel industry have been seriously implementing the guidelines of central economic work conference as well as the state's macro-control policies; using the scientific concept of development to guide the overall development of the iron and steel industry; grasping the important period of strategic opportunities with the vision of economic globalization to; effectively changing the pattern of economic growth; adjusting and optimizing the structure with efforts; enhancing resource conservation and environmental protection; insisting on the coordination of quality, efficiency and speed of development; making great efforts to promote the healthy development, thus achieving a good start in the first quarter.

There are five characteristics of the steel industry development:

1 Continued growth in production, a basic balance between supply and demand

Total of

Jan and Feb

Same period of last year

growthaccumulative

total %

Crude steel 7425.42 6031.02 1394.4 23.1

Pig iron 7006.55 5791.7 1214.85 21

Steel 7900.81 6299.81 1601 25.4

Coke 4692.72 3805.46 887.26 23.3

iron ore 8366.35 5692.3 2674.05 47

ferroalloy 222.79 158.89 63.9 40.2

Apparent steel consumption in steel markets up to 72.96m tons in the first two months, rose 17.4% over the same period of last year.

Crude steel apparent consumption amount to 66.82m tones, up by 13.4% y-o-y.

2 Market demand strong, imports and exports have shown good momentum

Steel imports up to 2.7m tons in the first two months, a year-on-year decrease of 13m tons, or 4.6%; steel exports as much as 8.75m tons, an increase of 5.09m tons y-o-y, or 139.3%.

Steel exports in the first two month each was 4.38m tones, slab exports in the two months totaled 7.12m tones, rising 5.75 m tones year on year.

Net imports of crude steel account for 9.6% of total imports, steel imports per day dropped 5.35% quarter on quarter, billet exports declined 9.94% in the same comparison.

3 Steel price return rationally, the smaller market volatility

Until March 30, comprehensive steel price index in domestic market was 109.8, an increase of 4.42% compared with the end of last year, with long products of 95.98, up by 4.59%; with the sheets of 116.59, up by 4.57%.

Prices at a reasonable interval.

4 Quality and efficiency of production improved Maintaining a high level of profits

78 big-and-medium-sized iron and steel enterprises registered a 39.11% y-o-y growth in overall industrial output in the first two months, realized a 1.51 times growth in tax and a 4.15 times growth in profits

Present a good start of profit growth rate higher than the growth in sales revenue, as well as sales revenue growing faster than output

Losses totaling of money-losing enterprise dropped 90.17%

5 Fixed assets investment increased slightly Macro-control policy effected

Ferrous metals mining, smelting and rolling accomplished a investment of 16.8 billion RMB in fixed assets for the two months, rose 3.4% over the same period of last year, 20 percentage points lower than the fixed assets investment in urban areas

11.262 billion RMB of investment by state-owned and state-holding enterprises, account for 71.3%; Non-state-owned enterprises invested 4.54 billion RMB, account for 28.7%, the proportion fall sharply

Three areas ranked top 3 in investment: Shanghai, Anhui and Jiangsu

This is a slight increase based on the negative growth in investment in the iron and steel of last year, shows that the state has a effective control over the investment in fixed assets of steel.

Ⅱ Analysis of supply and demand

situation in China's iron and steel industry in 2007

1 、 China's iron and steel industry is still in the growth period, but the growth rate will drop

In 2006, China's steel production has the trend of decline in the growth rate. The decline has its necessity and rationality. 2007 forecasts a continued decline in steel production.

The effect of state macro-control over the steel investments has begun to emerge. Along with the decline in investment in steel, capacity increase weakened. No longer support the growth rate of around 20% a few years ago.

The 2007 is the last year which the steel industry policy stipulates that blast furnaces smaller than 200 cubic meters, converters and EAF smaller than 20 tones should be closed, through the elimination of outdated equipment, related enterprises will reduce production release of the year.

Target forecast of China's major steel products in 2007

20062007

forecastIncrement over 2006

Growth rate over

2006Crude

production

419m t462m t

～ 475m t43m t

～ 56m t10.3%

～ 13.4 ％Steel

Production

467m t 527m t 60m t 12.85%

These forecasts based on the level of production and market demand and taken into account the national macro-control factors, thus bring forward the possible goals. (steel production contains repeat materials )

2 Forecast of apparent steel consumption in domestic markets

year

Total fixed asset

investment（’ 00 billion RMB ）

Crude steel apparent consumption（ million tones ）

Growth in Crude steel

consumption

Crude steel

consumption of FAI per ’00 billion RMBInvestment Growth

%Consum-

ptionProdu-

tionNet

importsGrowth

Growth Rate

2001 37214 13 16977 15103 1874 3032 21.74 0.456

2002 43500 16.9 20573 18225 2348 3596 21.18 0.473

2003 55567 27.7 25858 22234 3624 5285 25.69 0.465

2004 70477 26.6 29658 28291 1367 3801 14.7 0.421

2005 88604 25.7 34157 35579 -22 4499 15.16 0.3855

2006 109870 24 39832 4187

8 -3446 5665 16.58 0.3625

2007Forecast 1

129647 18 44200 4620

0 -2000 4368 10.97 0.3410

2007Forecast 2

131844 20 45500 4750

0 -2000 5668 14.22 0.3451

Actual figures for 2001-2004. Considering stock changes, the increased stocks of 14m t was absorbed by actual consumption in 2006,the results in 2005 and 2006 has been adjusted.

3 International steel prices will remain high The domestic market will be lower than the international

market price level According to the prediction of International Steel

Association, 2007 will have a basic balance between supply and demand in the global steel market and will have no serious oversupply situation providing the global economy has continued to maintain high growth.

Steel production costs (mainly energy, raw materials, labor costs and environmental costs) will not be dropped remarkably, steel and scrap availability will be tight on a phase basis, some of the world’s major iron and steel production will adjust production in accordance with market changes, and will support global steel prices fluctuated between a high price accordingly without a continued substantial downward.

The average international steel prices will remain at a high price fluctuation range.

Domestic market steel prices will be affected by a number of factors, including market supply and demand in the domestic market, the state‘s macro-control policies, the market expectations and the market competition order, the international trend of market prices, the situation of import and export trade, prices will remain lower than the international market price of the year 。 Along with the movements in international and domestic market, prices will fluctuate, but will not change too much. The annual cost ratio profit margin, the tax payments, as well as profits will maintain a good level.

North American market, compared with the European market and the Asian market, have a major impact on global price movements. China's domestic market price trend can not dominate the international market price trend, nor can it lead the international market prices.

Ⅲ Development trend and strategic thinking on China’s Steel Import and Export

The 2006 witnessed a historic change in China's steel export ， concluded the fact as a net importer of steel for 57 years and became a net steel exporter, which aroused world wide attention. We should make a comprehensive analysis and accurate assessment on the development of China's steel industry and exports increase .

⑴ A historic change on the situation of China's steel import and export

1 China has changed from a long-term net importer of steel to a net exporter of steel

For a long time, the steel production in China can not satisfy its own demands of national economic development due to a backward steel industry 。 During 1991-2005, China imported 328.89m tons of steel and was the biggest steel importer in the world, but only exported 104.38m tons in the same period, less than 3.15 times of the former.

In 2006, a historic change occurred for situation of China's steel import and export 。 According to statistics, the annual steel imports were 18.51 million tons, accounting for 3.9% of total steel production; and 43.01 million tons of steel exports, accounting for 9% of the total production of steel ； net exports were 24.5 million tons, accounting for 5.2% of the total production, as well as a net exports 8.67 million tons of billet. Converting all the steel and billet into crude steel, the exports totaled 54.31m tones, accounting for 12.85% of total crude steel production; and the imports totaled 34.46m tones, accounting for 8.2% of total crude steel production.

2 The main reasons for the decreased imports and increased exports and the impact on world economy

Strong steel demand in the international market provide an international market for China’s steel exports.

Steel price gap between domestic and international markets continue to expand, while returns on the export of steel is higher than the domestic market

The structure of export product improved, the slab and strip products increased, and the international competitiveness groed.

China's steel export tax rebate rate reduction stimulated the producer and export traders to focus on export.

In recent years, the global steel exports account for around 40% of total production. China's exports have a reasonable level.

China’s increased steel exports filled the gap between supply and demand in the global steel market, and good for the global balance between supply and demand and will ease inflationary pressures thus extend the world economic development cycle .

In recent years, the world's major steel-producing countries have been exported or imported in great quantities of steel, which reflectes the characteristics of economic globalization.

China has ended the 57 year long-period of a net importer since 1949, This is an important embodiment of economic globalization in the steel industry, it is also an important symbol of the improvement of the international competitiveness of China's iron and steel industry.

Large steel exports do not meet the steel industry policy orientation, China will continue to control exports of steel, steel exports will return to normal levels.

3 Prediction of the development trend of China's steel export in 2007

In 2007, due to the decrease of domestic steel production and the leg effect of export tax rebate rate reduction, China’s adaptation of a series of measures not to support the export of steel as well as the impact of steel trade protectionism on the rise, China’s steel and billet exports will decline.

The annual net exports of steel and billet is expected to reduce about 10 million tons, more than 60% of the steel exports would be plate, pipe and strip products, the long products exports proportion will also decline.

Steel imports will up to 17.5 million tons, maintain the basic level in 2006. Main imports are cold-rolled sheet steel, galvanized plate, stainless steel, electrical steel and other high value-added products. There are also a medium grade products. Import through processing trade volume maintained at around 50%.

Because of the prediction of steel export tax rebate rate is expected to further lower lead to a growth in export activities, export steel exports continued to grow in Jan and Fed of 2007 .The export growth will gradually fall late .

⑵ Understanding of the situation of China's steel

imports and exports and strategic choice

1 From the trend of the rapid development of China's iron and steel industry, a correct understanding of China's steel imports and exports is necessary.

The characteristics of this stage of our economic development, provide a strong impetus for the development of the iron and steel industry. China has proposed that in 2020 the grand objective of building a well-off society, realizing industrialization, increasing urbanization rate. upgrading of the consumption structure, and comprehensively promoting the new rural construction, which has opened up a broad market space for the development of the iron and steel industry, and strong domestic demand will become the dominant factor in the development of iron and steel.

Industries transferring worldwide has played a role booster for the development of China's iron and steel industry. From the beginning of the 20th century to the start of the 1980s, with the development of new technology, the in-depth development of the Internet and information technology, a large number of world traditional industries has been transferred. Some developed countries focus on high technology, the development of information technology, transferred the high-energy-consuming industries and labor-intensive industries to developing countries and emerging market countries.

China's steel industry has taken the transferred international steel industry, by absorbing and introducing foreign second-hand equipment and technology, as well as driven by strong demand in the domestic market, realized a production expansion.

Foreign investment in China's iron and steel industry has played an important role, Sino-foreign joint ventures and foreign-owned enterprises take advantage of cheap labor produced products sold to overseas market. Thus promoting the expansion of China's steel production and export increase.

The continued growth of the world economy and the expansion of the international steel market provide a rare opportunity for the increase in China’s steel exports. From the beginning of 2002, the world economy has entered its rising cycle, demand for steel products have been rapidly expanding . This need not only come from developed countries, but also from developing and emerging market countries. Chinese steel enterprises seized this period of important strategic opportunities.

China's iron and steel enterprises to raise the level of equipment, technology innovation and technical progress, to increase in the variety and improve the quality will provide technical support for China's imports reduction and exports expansion.

Moderate steel export is the inevitable choice for China's steel industry to actively participate in international market competition; is effective measures for structural adjustment, product quality and grades improvement as well as the level of technology upgrade; is the only way for China’s transformation from a large iron and steel nation to a powerful iron and steel nation .

2 From the perspective of economic globalization, have a dialectical understanding between the relationship of China's steel exports and the global steel market supply and demand.

Economic globalization is the basic feature of the current world economic development. Neither developed nor developing countries is a closed market. With the development of world trade, the free flow of goods, the market will achieve a balance between supply and demand in.

In 2006, global crude steel production was 1.2395 billion tons of, 4.2266 million tons of steel made in China, accounting for 34.1%. China's steel output has been included in the global market balance between supply and demand. Global steel export volume account for 40% of total production, and the export volume of China account for 9% of total steel production, which have been included in the global trade balance, achieved a basic balance between supply and demand in the global market as a whole.

World trade coordination mechanism, highly developed information transmission system further enhanced the market correlation in and abroad, and have a good effect on achieving a balance between supply and demand in the global market. Without China's increased steel exports, it is impossible to realize the global balance of supply and demand. China's rolled steel exports to the moderate trend is irreversible.

3 From the point view of value rule in market economy, have a comprehensive look at the difference in the level of imports and exports of steel prices.

According to Chinese customs statistics, in 2006 China imported 18.51 million tons of steel, the average CIF price was $ 1071.18 per ton CIF, 43.01 million tons of steel was exported, and the average FOB price was $610.2 per ton, price difference was $460.98 per ton. The difference is mainly due to the varieties of steel structure of imports and exports as well as the differences between import and export volume among similar products and the share of the total.

Products of different variety and quality have different price is a normal phenomenon. In the import and export of steel (billet) of the more than 300 varieties of different specifications, more than 70 varieties’ export prices higher than import prices. The export prices for alloy profiles are $350.03 per ton higher than import prices. Galvanized sheet with a higher of $ 75.97 per ton in export prices . stainless steel strip, 1.5-3.0 mm hot-rolled sheet, 1.0-3.0 mm hot-rolled stainless steel sheet, 1.0-3.0 mm cold rolled sheet and 0.5-1.0 mm cold-rolled stainless steel sheet with a higher export price of $482.63, $92.67, $323.24, $107.69, and $705.33, respectively.

One important feature of the market economy is the pursuit of profit maximization. The increase of sales profit rate is the pursuit of long-term goals. No one will dump the high-value products with a lower price.

Opposing trade protectionism, implementing fair market competition will benefit the consumers from all countries; Otherwise, it will damage the interests of consumers.

4 From changes in the macroeconomic environment and national policy, correctly grasp the development trend of China's steel export.

Strict control over fixed assets investment, to prevent expansion of steel production, which will slow down China's steel production growth rate, to reduce steel resources exports from the source .

Reduce exports and expand imports is our foreign trade policy in 2007. The main contradictions of China's current economic development are the big trade surplus, large foreign exchange reserves, much RMB appreciation pressure. This will become a major inhibition strength over steel exports.

China will reduce the export tax rebate rate of steel products, increase export tariffs and curb large volume exports of steel products, thereby squeezing the profit margins of steel products exports.

The rise of international trade protectionism and trade frictions have serious negative effects on fair competition of China's steel exports.

5 Positively deal with challenges, and promote the healthy development of China's iron and steel export trade

Implement the scientific concept of development, have a correct understanding of the relationship between domestic and international markets. adhere to the principle to meet the demand on the domestic market. Along with the country's economic development and the process of industrialization, there is a huge potential market for steel products. To meet the demand on the domestic market is an important indicator for measuring the healthy development of the iron and steel.

Iron and steel enterprises should combine business and state interests, short-term and long-term interests, and put top priority to meet the demand on the domestic market, contribute to the development of healthy and good for our economy.

Effectively change the mode of growth, from quantity-oriented to quality-efficiency-oriented. To change the situation of high exports of low value-added products and low exports of high value-added products; and change the situation of more quantity but less profit. Focus the export on lowering costs, improving quality and expanding the variety of high-value-added products, and the ability to earn foreign exchange through exports.

Implementing multi-level export products policy and geographical diversification of export strategy. The uneven development of the global economy leads to different levels of demand for export products, namely demand for medium-to-poor quality products and high-end products both exists. To improve research on export products information. Export orientation of the regional strategic shift to consolidate existing markets, and vigorously explore new markets. In recent years, strong demand in developing countries and emerging market countries arises. Change the export strategy from Europe and the United States to developing and emerging market countries in due time.

Actively deal with trade frictions, safeguarding the legitimate rights and interests of China's iron and steel enterprises. Iron and steel enterprises should strengthen self-discipline, and strictly abide by the WTO rules and positively deal with trade disputes. Give priority to talks and consultations on the trade disputes, resort to legal means as a supplemental alternative, and to solve them in accordance with the principle of fair competition, sound reasons as well as differential treatment, to promote the healthy development of China's iron and steel export.