Posted on 08 Sep 2009
After hitting a 10-month high in early August, steel prices in Chinese physical markets have turned south, bringing down spot iron ore prices and prompting steel mills to slash their offer prices for sales over the following months.
"I think this is a reaction to the prices that we have seen falling over the past month," said Su Aik Lim, steel analyst with Fitch Ratings in
"Production in July was really high, and since then it has probably been sustained over August, and the market has too much product right now," he said.
Hot rolled coil prices have fallen by 12 percent since their August peak, while spot iron ore prices in
Baosteel, the listed unit of
The company will also keep October prices of its hot-galvanizing steel, galvanizing steel and heavy steel plate unchanged compared with September, Umetal said.
Several major Chinese steel mills cut their product prices for September sales by up to 19 percent from their August levels last week, as spot prices continued to fall.
But Baosteel's decision to cut prices could suggest the market is reverting to normal, rather than signalling a slump in demand, Fitch's Lim said.
"The price-cost ratio has come back to average levels for this year, and they have stayed put at this level over the past week," he said.
He said the volatility in August was not just a result of an improved economic outlook, but could also have been caused by uncertainties surrounding iron ore pricing and the introduction of steel futures.
With the traditional "benchmark" long-term contract price thought to be in jeopardy, mills bought iron ore in heavy volumes over July and August, driving up prices which were then passed onto consumers.
With a de facto benchmark now in place, such market distortions could now end and a clearer picture of the industry can emerge, Lim suggested.
"After seeing the production figures (for August) we will get a better sense of what sort of output the market can absorb," Lim said. ($1=6.830 Yuan)
