1. On USD 586 billion or RMB 4 trillion stimulus package announced on Nov08, RMB 800 billion (or 20%) goes to building of low cost houses & RMB 1 trillion (or 25%) goes to building highway roads, road & rail way (Source: Starbiz 25 Nov08). In short, 45% of the stimulus package allocation goes to industries that required the heavy usage of steel. Therefore, that would serve favourably to stimulate China's domestic demand of the steel products / steel industry.

  2. China's National Development and Reform Commission (NDRC) has allocated and cashed in 1st batch of RMB 100 billion in the 4Q08 and 2nd batch allocated & cashed in another RMB 130 billion to boost its economy. Both these batches of fund were from the RMB 4 trillion stimulus package (Source: Xinhua News Agency , 3 Feb09). These have increased the demand of steel which explained the recent rise of share prices of Chinese Steel giants ie Baoshan Iron & Steel, Maanshan Iron & Steel and Angang Steel which had rised between 11% to 48% over the past 3 months.

  3. The Chinese State Council (or Cabinet) directive to ban the steelmakers from expanding their capacity from 20 Jan09 till 31 Dec09 is seen as another good move by the government to help to arrest China's domestic demand & supply imbalances of steel situation.

  4. The scrapped of export duties on flat-steel products (67 types) such as hot-rolled plate, cold-rolled coils mainly used for auto & shipbuilding on 1 Dec08 is seen as positive step by the Chinese government to encourage export of these steel products.

  5. China's steelmakers suffered USD 7 billion losses in 4Q08 because of inventories write-off besides lower selling price of steel. In June 2008, Baosteel Group (largest steel maker in China) signed agreement with London-based Rio to buy iron ore at USD 127 per ton, which is 97% increase from a year earlier. Between June 2008 and October 2008, spot price of iron ore prices plunged 62% resulting losses because of inventories write-down (Source: Starbiz 10 February 2009). Besides during 4Q08, the demand of steel in China and its export market for steel products were also weak as witnessed by Baosteel reduced production capacity by 20%, Arcelor Mittal reduced its production capacity by 35% & Russian's Severstal OAO reduced production capacity by 30% (Source: Nanyang Business, 27 November 2008). According to China's Iron & Steel Association (CISA), the profit after tax for many steel manufacturers in China in 2008 are expected to drop more than 50% as compare to a year before (Source, www.custeel.com, 22 January 2009)

Moving Forward (for Sino Hua-An)
  1. Started to see the demand of steel started to pick up since beginning of the year. Shanghai steel billet prices increased from RMB3100 in Nov08 to RMB3500 in mid-Feb09( 13% increased), the metallurgical coke price in Shandong Province, China increased from RMB 1360 to RMB 1800 (32% increased) from Nov08 to mid-Feb09. Coking coal in Nov08 was RMB1097, as at mid-Feb09 is RMB 1073 (dropped 2.2%), showed that the situation in China is now favourable (returned to normal demand/supply & positive price mechanism)to Sino Hua-An as selling price of metallurgical coke (our product) increases and coking coal (our raw material) price decreases resulting the spread between them widened.

  2. On another positive note, a recent Chinese media have reported that new loan issued in China for January 2009 reached RMB 1.62 trillion which is equivalent to more than 3 X the average figure in the first nine month of 2008. The major drawdown of credit facilities / loans by banks into the China domestic market will definitely create multiplier effect and boost up its economic growth (Source: Starbiz, 13 February 2009 & The Edge Financial Daily, 12 February 2009).

Therefore, with the government proactive support of steel industry in China, we believe that starting from middle of 1Q08 onwards (which indicated the curve had hit the bottom on Aug08/ Sep08 and seen the upswing started from Dec08 onwards), the demand of steel will gradually picking up which is favourable to Sino Hua-An as the production of steel by steelmakers in China required metallurgical coke.