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Holding out for better prices

By Zhang Qi (China Daily)
Updated: 2009-08-10 08:19

China's talks with BHP Billiton, Rio Tinto and Vale were clouded this year by Rio Tinto's rejection of a deal with Chinese aluminum firm Chinalco and the country's detention of four Shanghai-based Rio Tinto employees accused of stealing State secrets.

The China Iron and Steel Association reportedly is still holding out for a better deal than the 33 percent cut agreed to earlier by their Japanese counterparts with Rio Tinto.

Benchmark spot prices of iron ore in China surged above $100 a ton two weeks ago, driven by active buying, industry consultancy Mysteel.com said, marking a 74 percent jump from April lows, Reuters reported.

"Whether the prices will rise further or not depends on how soon Chinese steel mills announce a long-term price deal with overseas miners," said a trader based in the eastern province of Zhejiang who asked to be unidentified.

China's steel industry is the world's biggest producer and consumer driven by its manufacturing sector, construction and automobile industries.

The country has 1,200 mills, most of them small and medium-sized producers.

Despite the size of the industry, China's steel firms are disadvantaged in annual international iron ore negotiations due to their low industry concentration to achieve global competitiveness or the market power to negotiate with the global leading iron-ore suppliers.

Consolidation

Industry analysts consider consolidation the best way to deal with the situation.

In 2008, China's steel industry accelerated its pace in an industrial reshuffle in the face of the economic slowdown and with encouragement from the government.

There were 17 mergers and acquisitions in the steel industry in 2008. The top five steel groups will likely account for 45 percent of the country's total capacity next year from 28.6 percent at present.

Special Coverage: Iron Ore Price Talks Related readings:  Rizhao port restructures to rely less on iron ore imports Iron ore price negotiation still underway: CISA  CISA suggests agent body on iron ore imports  Steel lobby official takes tough stand on iron ore pricing talks

Thus, China's steel industry will continue to see large steel mills accelerating consolidation this year.

Major State-owned steel producers - including Wuhan Iron and Steel Group, Baosteel and Angang Steel - are expected to take the lead in consolidation this year, according to KPMG's latest steel industry report.

Strong rebound

Despite a slump on the global steel market, China's steel production has rebounded strongly this year, spurred by the 4 trillion yuan State stimulus plan, after a slump at the end of 2008.

China's crude steel production gained 1.2 percent to 266.6 million tons in the first half of 2009, the National Bureau of Statistics said, thanks to the stimulus package spurring demand from builders and carmakers.

And latest statistics also showed that China's crude steel output in June touched 45.39 million tons, while daily production in June was 1.51 million tons.

The rate of output was equivalent to an annual production of 552.2 million tons, up 10 percent from 2008.

Profits of Chinese steel mills in July were expected to exceed 20 billion yuan, as the monthly growth of steel prices rose to an eight-year high, industry analysts said.

Steel prices jumped in July, prompting steel industry profits to expand, according to Xu Xiangchun, chief analyst with industry information provider MySteel.com, Xinhua News Agency reported.

The benchmark index of MySteel.com for domestic steel prices rose 11.9 percent in July.

Net profits in hot-rolled coil and cold-rolled coil are estimated to stand at 600 yuan and 1,400 yuan per ton, as their prices gained by 376 yuan and 473 yuan per ton, respectively, in July, Xu said.

Full-year profits of China's steel makers will reach 100 billion yuan if steel price remains stable in the second half, he said.

A revival in demand and the government's economic stimulus will help stabilize steel prices, said Qi Xiangdong, vice secretary-general of the China Iron and Steel Association.

Reuters and Xinhua news agencies contributed to the story