Steel Prices May Be Nearing Lowest Level

飞雪寒冰

Brisk steel futures trading in the past two days may indicate steel prices are on the verge of a rebound, even as major steelmakers continue to slash prices while maintaining production, analysts said on Oct. 14.

On Oct. 10, Baoshan Iron & Steel Co. (SSE:600019) said it had cut steel product prices for November delivery by 400 to 500 yuan a ton from October, but the announcement coincided with the end of a steady decline in steel futures, which had fallen 30 percent over the past two months on the Shanghai Futures Exchange.

The open interest on the Shanghai exchange rose 13 percent on Oct. 13 from the previous trading day to 957,126 lots, sustaining a 38 percent increase on Oct. 12.

"The surge suggests investors are bottom fishing and indicates that steel futures prices may be approaching their lowest level," said Green Futures analyst Zheng Rui.

Mysteel.com analyst Xu Xiangchun said that steel prices are likely to fluctuate before a sustained rebound, reflecting escalating tension between futures investors and spot market traders.

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Steel prices have been falling since mid-August amid government's efforts to curb overcapacity. However, statistics from Mysteel.com show that domestic stock hit a new high of 11.9 million tons in early October, after prime steel output soared to a record 52 million tons in August, up 27 percent from January, driven by massive government spending since the spring.

On Oct. 9, Mysteel's weekly MySpic steel price index was 130, down 21 percent from its peak of 165 in early August. Baosteel's recent cut reflected a market trend followed by other major players, including Wuhan Iron & Steel Corp.

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Steel mills must slash production to boost prices, Mysteel's Xu told Caijing. However, major steelmakers, including Wuhan Iron & Steel, Shagang Group and Hunan Valin Iron & Steel, are reluctant to reduce output due to sufficient orders and funding. Hunan Valin told Caijing Oct. 12 that it had no plans to cut production in the second half as it was profitable at current prices.

Speaking on the sidelines of the World Steel Association's annual conference on Oct. 12, Shagang chairman Shen Wenrong said that some steelmakers are likely to cut production toward the end of October, but ruled out any such cuts by his own company. Baosteel told Caijing Oct. 13 that it was continuing to operate at 85-percent capacity despite the declining prices.  

Some analysts said earlier that the China Iron and Steel Association's forecast of a 5 percent contraction in steel demand in 2010 is too pessimistic, citing the recovery of downstream industries and strong housing starts figures in late summer, which tend to result in increased steel demand six months down the line.