Inside Track #10

• Raw material constraints, especially in China
• USA steel sheet buyers still 'sitting on their hands.'
• Marketplace feedback and random ravings

Peter Marcus, fresh from his three-week fact-finding tour, has a wealth of new information about the Chinese steel industry. WSD is now preparing an extensive "Core Report" tentatively to be titled: "China's Unbelievable Steel Industry."

Competition is incredibly intense among the players in China's steel industry, including the state-owned companies and the new private groups seeking to knock off their larger competitors. Price allocates resource at "warp speed" in China.

Perspectives on China

1. The Chinese industry is facing substantial raw material constraints at the present time. Iron ore and coke are in short supply. A Brazilian contact said one Chinese producer was seeking 9 million tonnes of iron ore and 1 million tonnes of slab, but was able to get only 6 million tonnes of iron ore and 0.3 million tonnes of slab.

• Prices for pig iron, HBI, steel scrap and slab are at elevated levels -- $200, $185, $190 and $280 per tonne, respectively. Some contacts say that the high raw materials costs may now be topping out amid resistance from Chinese producers to pay the high prices. One major trading contact reported shipping only three cargoes of scrap since the Chinese New Year celebration ended in early February.

• Chinese coke, 10.5% ash, for export is said to be priced at about $133 per tonne, F.O.B., up from $118 per tonne in January. Domestic coke, 13% ash, is about 780-850 RMB ($94-103) per tonne, 17.5% VAT included, up from about 725 RMB ($88) per tonne two months ago.

• The current average cost of iron ore fines delivered to Far Eastern users, including China, probably is about $24-25 per tonne. The market currently is so tight that the international iron ore producers probably will achieve a 10 percent increase in price. That, coupled with a narrowing of the discount to the Chinese and added freight costs, may boost their ore costs to $28 per tonne by next year.

2. Steel demand should continue to surge in the next few years because gross capital formation, which is funded by savings, may remain at 38-40% of GDP. However, GDP is growing at a rate of 7-8% a year.

3. The cost to construct steel plants in China is probably 60% below that in the West. Chinese plant costs may have fallen by 35% in the past four years because they contain fewer foreign components, have ever-lower design costs and there is growing competition to build the plants. The capital cost to build a new 6-tonne-per-year greenfield steel plant, on prepared land with a deep water port, might be only 14 billion RMB ($1.7 billion). This works out to less than $300 per tonne of capacity. Moreover, the plant is built fast which holds down interest costs during construction (with interest rates at only about 6 percent on borrowed funds). In comparison, in the West the figure for a comparable facility -- with sinter plants, coke ovens, blast furnace, BOF steelmaking, continuous casters and a hot strip mill -- probably would be at least $1,000 per tonne.

4. Capital expenditures on the Chinese steel industry may remain at huge levels. The current rate is 55-60 billion RMB per year. When taking into account the 60% lower cost to build equipment, at the current exchange rate of 8.27 RMB to the $1, this works out to an adjusted $17 billion per year.

5. Supply additions are massive in the steel sheet sector. About 60%, or $10 billion of the figure given in #4 above, is going into plants that produce hot-rolled band, cold-rolled coil and galvanized coil.

6. Steel traders play an important role in the Chinese steel industry. They may impact the market more than those in Japan, the USA and Europe, since there is less one-year contract business and more transactions are conducted on the spot market.

The buyers of foreign steel, according to WSD's contacts, are as follows:

Percentage of Groups Receiving Steel Imports

Product Trading Houses Mills End Users

Hot-rolled sheet 70% 10% 20%

Cold-rolled sheet 70 10 20

Galvanized sheet 80 0 20

Slab 0 100 0

7. China's pig iron production, and the degree of expansion, is far greater than we previously thought. In 2002, reported pig iron production was 170 million tonnes compared with 147 million tonnes in 2001. In addition, unreported pig iron output may have been 10 million tonnes. New capacity in the current year may add another 30-35 million tonnes to the market via traditional large blast furnace expansions and sometimes unreported mini-blast furnace additions.

8. The Chinese steel sheet market seems to be weakening.

• In China's domestic market over the past week, several mills' quotes for some hot-rolled coil (3.0 mm) products fell about 165 RMB ($20) per tonne to about 3,350-3,400 RMB ($405-411) per tonne. Thinner gauge (1.5 mm) material is down by about 205 RMB ($25) to about 4,150 RMB ($502) per tonne.
• Hot-rolled band exported to China is said to be as low as $340-345 per tonne on a C&F basis, down from a recent high of $380-390 per tonne.

• Foreign slab to China remains for the moment at about $275-285 per tonne, C&F. One contact, who has not been a big player, since September has shipped about 160,000 tonnes of slab to China.

USA steel sheet market still "on hold"

While sheet prices are staging some recovery at present, the tone of the market from the steel mills' perspective is only moderately better. Domestic demand remains weak, the export spike is abating and raw materials costs are way up.

• Here's some good news for domestic mills: The latest survey released by the American Institute for International Steel, the group representing importers, shows a dramatic drop in anticipated imports into the USA. Ninety-nine percent expect hot-rolled band imports to decrease, while 100% said they expect semi-finished steel imports to be down.

Domestic order entry at present is fair at best. Backlogs have improved to 4-8 weeks in some cases, but a portion includes order entries for export business that may not be replenished.

USA consumption in the first half, contacts say, may be at an annual rate of about 114 million net tons, compared with 117 million tons in 2002 and significantly down from the peak of 129 million tons in 2000. War worries, coupled with general economic sluggishness and reports that Detroit automakers are lowering production by 17-19 percent, may prevent any recovery until the second half. Next year, our commercial contacts hope for a recovery to 121 million tons.

• Buyers are still fighting the mills' attempts to raise second quarter prices by $20-30 per ton. Domestic hot-rolled band for mid-size buyers may be at $290-300 per net ton, F.O.B., up $10-15 in the past month. (Note: The price increases may only offset the mills' recent rise in raw materials costs.)

• Cold rolled coil is pegged at about $400-420 per ton, F.O.B., up $10 to $20 from a few weeks ago. Galvanized was pegged at $480-500 per ton, F.O.B.

Wire rod apparently has edged up to about $310 per ton ex-works, up about $10 from last week, in much of the country.

• Contacts said rebar this week is about $310-320 per ton, F.O.B. the steel plant, up from about $290-300 per ton in mid-February and about $260 per ton in January.

Ukraine not likely to reconsider scrap tax, contacts say

Europe continues to be plagued by shortages of scrap allegedly worsened by ice jams and the Ukrainian 30 Euro ($33) export tax. Although rumors surfaced over the past two weeks that the Ukraine would reconsider the tax, latest word from contacts is that the Ukrainian government may have decided to leave it intact.

• Industrial grade wire rod is about 320 Euros ($349) per tonne, F.O.B., up about 5 Euros per tonne over the last month.

• Rebar, delivered, is about 315-325 Euros ($343-354), contacts said, up about 30-40 Euros since December.

RANDOM RAVINGS

The Chinese steel industry is:

• Complex: Private steelmakers -- in effect China's version of the USA mini-mill sector -- are challenging the state-owned enterprises in both the long and flat products. This development is adding complexity to a pricing structure that is already highly volatile.

• Controversial: Are too many top executives in the Chinese steel industry making their decisions based on intuition? We think so. The "tea leaves" they've been reading are causing them to rush ahead to build plants before others do it. We visited with three groups that are moving ahead to build, on a combined basis, 18 million tonnes of "greenfield" steelmaking at coastal locations. All are constructing conventional plants with blast furnaces, coke ovens, standard-sized casters and hot strip mills. No persuasive data has been made available to these executives -- at least until our report is published in a few months -- to show them that their gut feeling about the supply/demand outlook may be misguided.

• Challenged: As developments in China increasingly impact the global steel market (i.e., steel prices), what actions might the Chinese take to benefit the industry in the years ahead?

The information contained in this report is based upon or derived from sources that are believed to be reliable; however, no representation is made that such information is accurate or complete in all material respects, and reliance upon such information as the basis for taking any actions is neither authorized nor warranted.

It should be noted that a variety of factors, including changes in prices, shifts in demand, variations in supply, international currency movements, technological developments, governmental actions and/or other factors, including our own misjudgments or mistakes, may cause the statements herein concerning present and future conditions, results and trends to be inaccurate.

The officers, directors, employees or stockholders of World Steel Dynamics Inc. may, at times, directly or indirectly hold securities of, and/or that are related to, one or more of the companies that are referred to herein. World Steel Dynamics Inc. may act as a consultant to one or more of the companies mentioned in this report.

Copyright2003 by World Steel Dynamics Inc., all rights reserved.