According to the China Iron and Steel Association, from the correlation between output and inventory, price and efficiency, for every 1% increase in output, inventory increased by 0.43%, and for every 1% increase in inventory, the price decreased by 0.47% and efficiency fell by 0.54%.
From the perspective of the past years, there is a significant negative correlation between the inventory level and the sales profit margin, and the higher the inventory, the lower the sales profit margin. At present, the inventory of enterprises is at the highest level in the same period in history, and reducing inventory as soon as possible is the primary task of the current industry to ensure efficiency.
The current steel inventory is still 4.0% higher than the same period in 2020 and 13.9% in the same period in 2021, while the apparent consumption has been significantly lower than the level of 2020 and 2021, and there is room for further reduction in steel inventory.
1. Background
Since the beginning of this year, affected by the lack of effective downstream demand and the delay in demand after the Spring Festival, there has been an imbalance between steel supply and demand, and the overall performance of steel prices has been sluggish, showing a continuous downward trend, and corporate efficiency has also declined seriously. Especially since March, the output has increased, the inventory of steel mills and social inventory have increased rapidly, the steel price has fallen significantly, the marginal benefits of enterprises have decreased, and the pressure on production and operation has further increased.
Steel production, inventory, price and corporate efficiency are interrelated, affecting the stable operation of the market and industry. Through a preliminary analysis of the correspondence between steel production, inventory, price and efficiency, in order to find out the rules and provide data support for industry decision-making.
The sample data of this study are from July 2022 to March 2024. Ignore changes in steel demand and corporate cost of sales, or assume that steel demand and corporate cost of sales remain unchanged during the review period.
Second, the recent operation of the industry
In terms of output, in the first quarter of 2024, the country's cumulative crude steel output will be 257 million tons, down 1.9% year-on-year. The apparent consumption of crude steel in the country was 232.17 million tons, a year-on-year decrease of 11.11 million tons, a decrease of 4.6%. Crude steel production fell slightly, but apparent consumption fell even more, and overall, supply was stronger than demand in the first quarter.
From the perspective of enterprise inventory, in late March, the steel inventory of key statistics of iron and steel enterprises was 18.43 million tons, an increase of 1.17 million tons over the same period last year, an increase of 10.88%, and the steel inventory was the highest in the same period in history (see Table 1). In the first quarter, the average inventory of steel was 16.837 million tons, a decrease of 530,000 tons or 3.07% over the same period last year.
From the perspective of domestic market prices, in the first quarter, the average value of China's steel price index (CSPI) was 109.95 points, a year-on-year decrease of 7.38 points, or 6.29%. In the first quarter, the average comprehensive settlement price of steel products of iron and steel enterprises was 3,964 yuan/ton, a year-on-year decrease of 216 yuan/ton, a decrease of 5.17%.
From the perspective of efficiency, in the first quarter, the cumulative operating income of key statistics iron and steel enterprises was 1,493.678 billion yuan, a year-on-year decrease of 4.55%; the operating cost was 1,422.499 billion yuan, down 3.99% year-on-year; the total profit was 8.708 billion yuan, a year-on-year decrease of 47.91%; The average sales margin was 0.58%, down 0.49 percentage points year-on-year.
Judging from the growth rate of steel output in the first quarter (see Table 2), the growth rate of steel output is higher than that of provinces and cities across the country, and the average steel inventory of enterprises accounts for a larger proportion of average steel output.
Judging from the growth rate of average steel inventory in the first quarter (see Table 3), the growth rate of average steel inventory of enterprises is higher than that of provinces and cities across the country, the sales profit margin is lower, and the sales profit margin declines faster.
3. Correspondence analysis
1. The correspondence between production and inventory
Through the correlation analysis between the national crude steel output and the month-end steel inventory of key statistical iron and steel enterprises from July 2022 to February 2024, the correlation coefficient between the national crude steel output and the month-end steel inventory of key statistical iron and steel enterprises is 0.43, which is moderately positive (see Figure 1). Among them, 95.73 million tons of crude steel were produced in March 2023, the highest value since July 2022, corresponding to 17.25 million tons of steel inventory at the end of the month, which was a high value; In December 2023, crude steel production was 67.44 million tons, the lowest value since July 2022, corresponding to the low value of steel inventories at the end of the month to 12.36 million tons. That is, the output increases, and part of the steel that increases production is converted into inventory; or production is reduced, and part of the existing inventory can be consumed.
Figure 1 Comparison of national crude steel output and enterprise steel inventory (unit: 10,000 tons)
Especially in the central and western regions, the positive correlation is high. For example, the correlation coefficient of Gansu Province is 0.64, of which 1,004,100 tons of crude steel were produced in February 2024, the highest value since July 2022, corresponding to the highest value of steel inventory at the end of the month rose to 505,000 tons, and 561,900 tons of crude steel were produced in December 2022, the lowest value since July 2022, corresponding to the lowest value of steel inventory at the end of the month fell to 120,400 tons, which was the lowest value.
The correlation coefficient of Shaanxi Province is 0.69, of which 1,390,800 tons of crude steel were produced in October 2022, the highest value since July 2022, corresponding to the highest value of steel inventory at the end of the month rose to 204,400 tons, and 769,500 tons of crude steel were produced in February 2024, the lowest value since July 2022, corresponding to the lowest value of steel inventory at the end of the month to 31,500 tons.
2. The correspondence between output and price
Through the correlation analysis between the year-on-year increase and decrease of national crude steel output and the year-on-year comprehensive settlement price of steel products of key statistical iron and steel enterprises in each month from July 2022 to February 2024, the year-on-year correlation coefficient between the year-on-year increase and decrease of national crude steel output and the comprehensive settlement price of steel products of key statistical iron and steel enterprises is -0.37, and the overall performance is a low negative correlation (see Figure 2). That is, if production increases, prices are likely to fall.
Figure 2 Comparison of the year-on-year increase and decrease of national crude steel output and the year-on-year increase and decrease of the comprehensive settlement price of steel (unit: 10,000 tons, yuan/ton)
Although the overall performance was low negative correlation, from the perspective of provinces and cities, individual provinces and cities showed a high negative correlation. For example, the correlation coefficient of Shandong Province is -0.69, of which the crude steel production in October 2022 increased by 2.911 million tons year-on-year, the highest value since July 2022, corresponding to a year-on-year decrease of 1,626 yuan/ton in the comprehensive settlement price of steel in that month, which is the lowest value; The crude steel production in November 2023 decreased by 1.589 million tons year-on-year, the lowest value since July 2022, corresponding to a year-on-year increase of 101 yuan/ton in the comprehensive settlement price of steel in that month, which was the highest value.
The correlation coefficient of Hunan Province was -0.70, of which the crude steel production in November 2022 increased by 629,000 tons year-on-year, the highest value since July 2022, corresponding to a year-on-year decrease of 1,146 yuan/ton in the comprehensive settlement price of steel in that month, which was a low value; The crude steel production in November 2023 decreased by 469,000 tons year-on-year, the lowest value since July 2022, corresponding to the year-on-year decrease of 4 yuan/ton in the comprehensive settlement price of steel in that month, which was the highest value.
3. The correspondence between output and efficiency
Through the correlation analysis between the year-on-year increase and decrease of national crude steel output and the year-on-year sales profit margin of key statistical iron and steel enterprises in each month from July 2022 to February 2024, the year-on-year correlation coefficient between the year-on-year increase and decrease of national crude steel output and the sales profit margin of key statistical iron and steel enterprises is -0.20, and the overall performance is a low negative correlation (see Figure 3). That is, production increases, and corporate profits are likely to fall.
Figure 3 Year-on-year increase and decrease in crude steel output and year-on-year comparison of sales profit margin (unit: 10,000 tons)
Although the overall performance was low negative correlation, from the perspective of provinces and cities, individual provinces and cities showed a high negative correlation. For example, the correlation coefficient of Sichuan Province is -0.39, of which the crude steel production in August 2022 increased by 1.153 million tons year-on-year, the highest value since July 2022, corresponding to a year-on-year decrease of 7.08 percentage points in the sales profit margin of the month, which is a low value, and the crude steel production in December 2023 decreased by 657,000 tons year-on-year, which is the lowest value since July 2022, corresponding to a year-on-year increase of 3.76 percentage points in the sales profit margin of the month, which is a high value.
4. The correspondence between the inventory quantity and the price
Through the correlation analysis between the month-end steel inventory of key statistics of iron and steel enterprises and the year-on-year increase or decrease of the comprehensive settlement price of steel from July 2022 to February 2024, the correlation coefficient between the steel inventory and the year-on-year increase or decrease of the comprehensive settlement price of steel is -0.47, which is moderately negative (see Figure 4). Among them, the steel inventory at the end of April 2023 was 18.11 million tons, which was the highest value since July 2022, corresponding to a year-on-year decrease of 811 yuan/ton in the comprehensive settlement price of steel in that month, which was a low value; The steel inventory at the end of December 2023 was 12.36 million tons, the lowest value since July 2022, corresponding to a year-on-year decrease of 7 yuan/ton in the comprehensive settlement price of steel in that month, which was the highest value. When there is an oversupply in the market, steel prices can fall, i.e. high inventories usually mean that market demand is not enough to absorb current production, resulting in steel companies having to lower prices to stimulate sales.
Figure 4 Comparison of year-on-year increase and decrease between steel inventory and steel comprehensive settlement price (unit: 10,000 tons, yuan/ton)
Especially in the eastern region, the negative correlation is high. For example, the correlation coefficient of Jiangxi Province is -0.71, of which the steel inventory at the end of October 2022 is 915,700 tons, which is the highest value since July 2022, corresponding to the year-on-year decrease of 1,596 yuan/ton in the comprehensive settlement price of steel in that month, which is the lowest value; The steel inventory at the end of December 2023 was 269,000 tons, the lowest value since July 2022, corresponding to a year-on-year increase of 114 yuan/ton in the comprehensive settlement price of steel in that month, which was the highest value.
The correlation coefficient of Shandong Province is -0.71, of which the steel inventory at the end of November 2022 is 656,600 tons, the highest value since July 2022, corresponding to the year-on-year decrease of 1,201 yuan/ton in the comprehensive settlement price of steel in that month, which is a low value; The steel inventory at the end of December 2023 was 315,600 tons, the lowest value since July 2022, corresponding to a year-on-year increase of 64 yuan/ton in the comprehensive settlement price of steel in that month, which was a high value.
5. The correspondence between inventory and efficiency
Through the correlation analysis between the year-on-year increase and decrease of steel inventory and sales profit margin of key statistics of iron and steel enterprises from July 2022 to February 2024, the correlation coefficient between the year-on-year increase and decrease of steel inventory and sales profit margin is -0.54, which is moderately negative (see Figure 5). Among them, the steel inventory at the end of September 2022 increased by 3.929 million tons year-on-year, the highest value since July 2022, corresponding to a sales profit margin of -0.06% in that month, which is a low value; At the end of July 2023, the steel inventory fell by 2.11 million tons year-on-year, the lowest value since July 2022, corresponding to a high sales margin of 1.71% in the month. That is, an increase in inventory may lead to a decrease in corporate profits.
Figure 5 Comparison of year-on-year increase and decrease in steel inventory and sales profit margin (unit: 10,000 tons, %)
Especially in the southwestern region, the negative correlation is high. For example, the correlation coefficient of Henan Province is -0.63, of which the steel inventory at the end of February 2024 increased by 153,200 tons year-on-year, the highest value since July 2022, corresponding to the sales profit margin of -2.98% in that month, which is the lowest value; Steel inventories at the end of June 2023 fell by 76,000 tons year-on-year, the lowest since July 2022, corresponding to a high sales margin of 1.45% in that month.
The correlation coefficient of Yunnan Province is -0.70, of which the steel inventory at the end of September 2022 increased by 352,000 tons year-on-year, the highest value since July 2022, corresponding to the sales profit margin of -7.13% in that month, which is a low value; Steel inventories at the end of November 2023 decreased by 213,500 tons year-on-year, the lowest value since July 2022, corresponding to the highest sales margin of 0.45% in that month.
6. The correspondence between price and efficiency
Through the correlation analysis of the year-on-year increase or decrease of the comprehensive settlement price of steel products and the year-on-year sales profit margin of key statistical iron and steel enterprises from July 2022 to February 2024, the year-on-year correlation coefficient between the year-on-year increase or decrease of the comprehensive settlement price of steel and the sales profit margin is 0.74, which is highly positively correlated (see Figure 6). Among them, the comprehensive settlement price of steel in December 2023 decreased by 7 yuan/ton year-on-year, the highest value since July 2022, corresponding to a year-on-year increase of 1.49 percentage points in the sales profit margin of the month, which is a high value, and the comprehensive settlement price of steel in October 2022 decreased by 1434 yuan/ton year-on-year, the lowest value since July 2022, corresponding to a year-on-year decrease of 4.37 percentage points in the sales profit margin of the month, which is a low value. That is, the increase in the settlement price of the product is likely to lead to the growth of corporate profits and the increase in sales profit margin, and there is a strong direct relationship between the increase in settlement price and the increase in sales profit margin.
Figure 6 Year-on-year increase and decrease of steel comprehensive settlement price and year-on-year comparison of sales profit margin (unit: 10,000 tons, %)
In particular, the positive correlation is higher in the central and eastern regions. For example, the correlation coefficient of Anhui Province is 0.86, of which the comprehensive settlement price of steel in November 2023 increased by 93 yuan/ton year-on-year, the highest value since July 2022, corresponding to a year-on-year increase of 5.71 percentage points in the sales profit margin of the month, which is the highest value, and the comprehensive settlement price of steel in August 2022 decreased by 1531 yuan/ton year-on-year, which is the lowest value since July 2022, corresponding to a year-on-year decrease of 12.19 percentage points in the sales profit margin of the month, which is the lowest value.
The correlation coefficient of Zhejiang Province is 0.75, of which the comprehensive settlement price of steel in December 2023 increased by 43 yuan/ton year-on-year, the highest value since July 2022, corresponding to a year-on-year increase of 7.37 percentage points in the sales profit margin of the month, which is the highest value, and the comprehensive settlement price of steel in August 2022 decreased by 1543 yuan/ton year-on-year, the lowest value since July 2022, corresponding to a year-on-year decrease of 7.82 percentage points in the sales profit margin of the month, which is the lowest value.
IV. Conclusions and Recommendations
From the perspective of the correlation relationship and operation logic between output and inventory, price and efficiency (see Table 4), the increase of output may lead to inventory backlog (correlation coefficient 0.43), the increase of inventory is often accompanied by the decline of selling price (correlation coefficient -0.47), and the decline in price will eventually lead to the decline of enterprise efficiency (correlation coefficient 0.74).
It can be seen that the correlation analysis between output and inventory is moderately positive at 0.43, and the inventory increases by 0.43% for every 1% increase in output. The correlation between inventory and price was moderately negative at -0.47, with a price decrease of 0.47% for every 1% increase in inventory. The correlation analysis between inventory and efficiency was -0.54 with a moderate negative correlation, and the efficiency decreased by 0.54% for every 1% increase in inventory.
From the perspective of the past years, there is a significant negative correlation between the inventory level and the sales profit margin, and the higher the inventory, the lower the sales profit margin. At present, the inventory of enterprises is at the highest level in the same period in history (see Table 5), and reducing inventory as soon as possible is the primary task of the current industry to ensure efficiency.
Since the Spring Festival, the steel market has experienced a significant downward cycle, characterized by high output, high cost, high inventory, low demand, low price, and low profitability of the "three highs and three lows" situation. In the face of the severe market situation, iron and steel enterprises need to take practical and effective measures to follow the production mode of "meeting user needs for the purpose of balancing supply and demand", adhere to the principle of "three determinations and three don'ts", implement refined production scheduling strategies, moderately adjust the production rhythm, reduce ineffective supply, avoid inventory backlog caused by excessive production, and promote the balance of supply and demand.
To sum up, iron and steel enterprises in the current market environment to actively respond, take multiple measures at the same time, scientifically formulate production plans, reasonable control of inventory, optimize product structure, reduce costs and increase efficiency, strengthen risk management and actively respond to government policies, in order to maximize economic benefits and market competitiveness as the goal, improve the quality and efficiency of production and operation. The current steel inventory is still 4.0% higher than the same period in 2020 and 13.9% in the same period in 2021, while the apparent consumption has been significantly lower than the level in 2020 and 2021, and there is room for steel companies to further reduce inventory. Enterprises should continue to pay attention to market dynamics and flexibly adjust their business strategies to ensure that they maintain a steady development momentum in a complex and volatile market environment.
Source: China Iron and Steel Association.
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