KangLi Stocked Up and Prepared Ahead of Steel Price Hike

The CEO of the Chinese steel products company shares his strategy amid skyrocketing industry prices.
CapitalWatch StaffJun 09,2021,22:00

Hot-rolled steel coil prices rose more than 60% year-to-date and 200% over the past 12 months. Just in May and April, the price increased more than 20%.

Last month, China saw record monthly crude steel output despite the government’s encouragement to cut production, according to data cited by Reuters. And steel demand is high not just in China, but in Europe and the United States as well, in a rebound from pandemic-induced lows. As Barron’s wrote, “economic recovery has allowed steel mills to raise prices aggressively.”

The surging steel prices have forced some construction companies to slow purchases of metal. Those that have stocked up on inventory may enjoy short-term relief.

Zhihong Zhang, the chief executive officer of KangLi International Holdings Ltd. (HKЕХ: 6890), said the company has been “paying close attention to hot-rolled futures, steel mill prices and market spot price trends.” KangLi’s management team predicted that steel price would rise after Covid-19, so the company purchased in advance the hot-rolled coil for production, which is the company’s main raw material.

KangLi's customers can be divided into two categories: purchasers of coils from the company directly, and buyers of sheet. Coil customer orders are in price-locking mode, and usually, the company stocks up according to the contracted quantity, said Zhang. Customers that purchased sheets from KangLi adopt the spot sales model, for which the company usually reserves four to six months of raw materials in advance to prepare against sudden price surge.

In response to the raw material price hike, the sale price of the company’s products also rose correspondingly, partially covering the increase in raw materials.

KangLi said the company reviews the steel price monthly and adjusts the sales price for the following month accordingly.

In order to hedge the steel price fluctuation, the company has adopted two measures: first, the company actively seeks more raw material suppliers; second, it uses futures contracts as a hedging strategy.

Experts in the industry believe that in the short run the steel market will decline and prices will stabilize as regulators in China step in, warning local mills against price gouging, collusion, and other irregularities that might disrupt market order, according to Reuters.

Fitch Ratings said in a note that it expects “the rally in China’s steel price to slow in coming weeks as summer approaches, as the season tends to see lower downstream demand due to subdued construction activity.”

However, in the long run, Zhang believes steel prices will remain high and relatively strong due to factors such as expansionary monetary policy, new environmental curbs, and national carbon neutrality targets, etc.

KangLi International, through its subsidiaries, manufactures and markets unpainted galvanized steel products and cold rolled steel products to midstream steel product processors for processing refrigerators, washing machines, and ovens. The company distributes its cold rolled steel products under the brand name of Jiangnan to the domestic and overseas markets.

The company’s shares were listed on the Stock Exchange of Hong Kong in November 2018.

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