Asia Steel-China steel prices steady as traders eye new year

28. January. 2010
Reuters

Chinese steel prices remained steady this week, with buyers and sellers retreating from an uncertain market ahead of the Lunar New Year holiday that starts Feb. 14 and lasts for about 10 days.

Industry consultancy Mysteel said construction steel prices in Shanghai stood at 3,640-3,650 yuan ($533.2) on Wednesday, unchanged since last week. Prices of all products fell by an average of 1.4 percent last week, Mysteel data showed.

Three-month rebar contracts on the Shanghai Futures Exchange SRBc3 were selling at 4,162 yuan by close of play on Wednesday, down 1.3 percent from the same time last week.

A Tianjin-based trader said that the market was playing wait-and-see as the Chinese, or Lunar New Year approached.

"From my point of view, we have enough stock so we aren't buying, and prices aren't going to rise before the holiday so we aren't selling. The market will slow gradually until after the holiday," he said.

Market jitters began when China decided to raise reserve ratio requirements at banks, signalling an end to the easy credit that has driven the country's construction sector and demand for steel.

Optimism was also undermined by a shock decision by leading steel maker Baosteel (600019.SS) to delay price increases for February, and by worries about high inventories, which might make it difficult for steel mills to pass high ore and coking coal prices to customers.

But Ross Warner, director at the New York-listed General Steel Holdings (GSI.N) which has all of its operations in China, said it was a mistake to see the market as a "monolithic whole." "We're expecting prices to fluctuate within reasonable bands this year, but demand is strong. We are unique in that most of our demand is from infrastructure development and 70 percent of our sales are already locked in for this year," he said.

But whatever happens to the volatile real estate sector in Beijing and Shanghai, there remain "strong pockets of demand" in central and western China, where the country is still embarking on a substantial infrastructure build-up, Warner said.

A trader based in Shanghai said that China needs to be careful about cutting back on overcapacity because western and central China is served by small operators, not state-owned giants on the eastern coast.

"Consolidation is a good idea, but the large-scale mills in eastern China can't satisfy the whole country," he said.

BEWARE THE BANKS

China's newly vigilant banks might also have something to say about the big steel and iron ore stockpile build-up at mills during last year's efforts to stimulate the economy through easy loans.

Many banks have now been instructed to hold back on issuing new credit to steel companies, which might delay a number of expansion plans and mills are under pressure to justify their use of earlier cheap credit, a Hong Kong-based commodities broker said.

In 2008, many steel mills bought more ore than needed at benchmark prices and sold surpluses on the spot market until the global economic meltdown left them with large amounts of supplies they couldn't afford to offload.

"They had big stockpiles of material that they couldn't sell, and it became a problem of cash flow, so they borrowed money to buy cheaper iron ore on the spot market," the broker said.

The mills aren't just steel producers, but also iron ore traders, and continued to buy frantically in December and January to trade in the market while passing on rising production costs to consumers.

As a result, Baosteel's surprise decision to halt price rises for February sent a jolt through the market, by suggesting that political pressure to rein in product price as the country gears for another tiring round of negotiations with iron ore suppliers.

But the trend is not uniform.

Anshan Iron and Steel 000898.SZ and Wuhan Iron and Steel (600005.SS) both refused to follow Baosteel's lead for February, raising prices for the majority of steel products by 50-230 yuan per tonne, according to a notice issued to traders at the end of last week.

Hebei Iron and Steel also raised its February rebar, wire rod and medium plate prices this week.

Zhang Shibao, an analyst with Merchant Securities, said that prices were likely to be weak up to the Lunar New Year.

"We predict prices will remain weak before the New Year, but once stockpiles are digested ... real estate and infrastructure construction rates will increase, and the overall trend of price increases will not change," Zhang said in a note.
($1=6.826 Yuan)