Guest column: Steel product price hikes create risks for Chinese mills and traders

by Ma Zhongpu

In this the first metals guest column, Ma Zhongpu of ChinaCCM.com analyzes the reasons behind the recent increases in domestic steel product prices and the possible risks involved. Translated from the original Chinese by Ginger Ding.

                                                                                      Ma Zhongpu of ChinaCCM.com

Shanghai. February 12. INTERFAX-CHINA - Since the start of 2009, domestic prices of construction steel products have fluctuated and climbed, with average increases of between RMB 120 ($17.56) and RMB 160 ($23.41) per ton seen in the cities of Shanghai, Beijing, and Tianjin.

Hot-rolled coil in these cities also grew slightly in price, and it is likely that in the coming weeks, market prices will see an upward trend, especially after recent increases of ex-works prices.

Steel product prices have been on a bit of a rollercoaster ride in recent months. Higher product prices led to slack transaction levels, which was followed by price corrections, and later led to price hikes on increased purchases.

The movements in steel product prices have been subject to variables including low stockpiles of steel mills, after product prices slumped for an extended period of time, and traders lifting prices to counter previous losses, regardless of the fact that in the past three months, steel product consumption has not actually stepped up.

Meanwhile, market supply has been a variable affecting price. Steel mills, which incurred losses in late 2008 due to sharp drops in product prices, scaled back production by an average of 17 percent in November, although that figure fell to 12 percent in December.

Now, risks lie in the changing economic environment. The first half of this year will differ from that of 2008 as we will see significantly weakened steel product demand from both domestic and international markets. But when steel product prices rise and improved profitability of mills lead to the ramp up of production at previously idle facilities, it is expected that stockpile volume will expand, which will put downward pressure on prices.

In some areas of the country, steel mills' ex-works prices already exceed traders' sales prices, which have pushed traders to lift sales prices regardless of downstream demand, further exposing them to risk.

In the meantime, the global economic downturn and current low-level corrections to overseas steel markets will have a negative impact on China's exports of mechanical and electrical products, as well as exports from the shipbuilding sector and steel products.

China, the world's top steel product exporter with an average of over 60 million tons per annum, will face much pressure domestically in the near future, due to a slump in exports coupled with higher domestic prices that will trigger significant increases of hot-rolled and cold-rolled coil and plate imports.

Recently, international steel product prices have followed China's price movements and rebounded a little, but this is likely to be temporary with the ongoing global economic downturn. That saying, the domestic steel product market is not expected to see sharp drops, as long as these risks are under control.

As an individual trader or steel mill in a market like this, the best thing to do is follow market trends, mitigate risks and keep stockpiles at a reasonable level.

The above is a personal opinion piece by the author. Its publication in no way implies that Interfax shares the views expressed in the article.

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(關鍵字：鋼市風險)