Chinese steel mills forecast price rise

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29 Jan 2009

Most Chinese steel mills expect steel prices to rise this year in spite of gloomy prospects for domestic demand and exports, according to a new survey from Steel Business Briefing, the consultancy. The rosy forecast comes as Chinese mills and global miners Vale of Brazil, Rio Tinto and BHP Billiton start their annual iron ore price negotiations, in which steelmakers are demanding a record cut for the key raw material input for steel.
Of the 24 mills surveyed – which included eight of the top 10 Chinese mills – a majority expect average steel prices this year to be higher than current levels, even though half expect domestic steel demand to fall and two-thirds expect exports to decline.
A majority of mills also believed average raw materials prices will fall more than average steel prices, boosting margins.
Graeme Train, research manager in Asia at Steel Business Briefing, said optimism about prices may be misplaced.
“People are expecting less demand and less production but also raw materials prices to fall more than steel prices,” he said. “They’ve misunderstood the market: when raw materials prices go down, so do steel prices.”
Chinese and Japanese steelmakers are expected to ask for a record cut in iron ore for their annual contracts, which run from April.
Some industry analysts say a cut of 30-40 per cent is possible but miners are delaying the negotiations, gambling on a recovery during the spring. Last year, prices jumped 80-90 per cent.
The Baltic Dry index, a measure of transport cost for dry bulk commodities such as iron ore and coal, this week rose to a three-month high above 1,000 points, up more than 50 per cent from its December lows, suggesting a pick-up in ore demand.
China’s December 2008 steel output rose 3.9 per cent month-on-month as small and large mills increased capacity utilisation. “Output may be increasing too quickly ... mills are in danger of overshooting, killing off any chance of a sustained price recovery,” Steel Business Briefing said on Wednesday.
But analysts believe that recent boosts in output from Chinese mills – eager to take advantage of a modest price rise and restocking by traders and end users at the end of last year – could extinguish the recent recovery in Chinese steel prices.
Predicting steel output and demand in China is difficult because of the uncertainty of the economic outlook this year, steel market analysts say.
Beijing’s Rmb4,000bn ($585bn) economic stimulus package is expected to have an impact on demand, especially in the second half of the year, but it is not clear how big that impact will be.
HSBC said in a recent note that the stimulus package would “not make up for the loss of exports and the slowdown in domestic demand”.
Xu Lejiang, president of Baosteel, also said recently that demand from new infrastructure projects would not make up for reduced demand elsewhere.
Steel Business Briefing predicts 2009 output could fall by 5 per cent from 500m tonnes in 2008. Last year’s output was 1.1 per cent higher than 2007.

Source: The Financial Times