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Steel mills brace for output cuts

By Wang Ying (China Daily)
Updated: 2009-03-19 07:42

A worker applies a label on manufactured steel rolls at a Baosteel facility outside Shanghai. [Agencies]

Steel producers in China are planning another round of output cuts due to the continuing poor demand and lower prices, according to analysts.

The focus of the China Iron & Steel Association (CISA) meeting last week was on how to keep productivity under control and on whether it was necessary for another round of production cuts now.

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Some of the steel mills have already slashed their output and even halted production. Luo Binsheng, vice-president of CISA, said the falling steel prices in February could trigger an industry wide output cut.

"The output cut is within our expectations. Since March, we have been having problems in getting orders," said Jiang Qiu, analyst, Guotai Jun'an Securities.

Unlike last quarter's cut that battered large steel companies, Jiang noted this time small- and medium-size steel producers will feel the pinch more, "partly because steel giants like Baosteel have yet to reach full capacity production".

Over the last two months, the rising price of steel used for construction has prodded many small steel mills to run on full capacity. "The central government's stimulus policy and a projected demand pickup led to a stockpile of steel products and raw materials," said Hu Kai, an industry analyst with metals information provider Umetal.com.

The inventory of steel products in China's major cities soared to 10.96 million tons from 5.66 million tons in December, while iron ore inventory has nearly reached last year's level of 70 million tons.

The reason behind this, as Hu explained, is that many domestic producers bet on iron ore prices going up in the next few months. However, iron ore prices fell from January's level of $80 per ton to $60 per ton now.

As a result, a twisted price relationship is now visible with raw material costs exceeding steel products prices. For instance, hot-rolled steel is priced between 3,200-3,300 yuan per ton currently, but the product cost can reach 3,500 yuan per ton, data from Mysteel.com showed.

Jiang expects steel product prices to bottom out in the next two to three weeks. He also expects a temporary balance between supply and demand after the production cuts are implemented.

Of the 20 listed steel firms that have released their earnings forecast for 2008, 19 firms estimated a sharp loss.

In addition, a majority of them expect their net profit to drop 50 percent or more from that of 2007. Market analysts also estimated the profit of the steel industry in 2008 at 85 billion yuan, down 41 percent from 2007's 144.7 billion yuan.