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.
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.