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China spot prices fall again on inventory build-up

(Agencies)
Updated: 2009-02-26 14:23

Chinese spot steel prices fell 5.3 percent in a third consecutive weekly fall, on rising inventory after a much-anticipated demand recovery failed to materialise.

Related readings:  Steelmakers' earnings drop on weak demand  Steel trade faces stiff challenges  Major Chinese steel makers' net profit down 43% in 2008

Prices of China's benchmark hot-rolled coil fell to around 3,527 yuan ($515.9) a ton this week, from 3,665/3,785 quoted last week, data from Metal Bulletin showed.

"Many mills are offering discounts to their list prices to reduce inventory as demand from end-customers is quite weak," said a trader.

China, the only major market that has seen spot steel prices rising in recent months, spurred by the government's nearly $600 billion spending plan, joined other markets this month as demand continues to remain weak.

"Downstream orders have recently improved compared with the last quarter, but they have still fallen markedly from a year earlier," Baosteel said on Wednesday.

The reversal in prices, triggered to a large extent by increased output in the absence of a strong demand recovery, may continue for the coming months as output continues to rise.

China, the world's biggest steel producer and consumer, raised production for a second consecutive month in January from the previous month, encouraged by the government spending plan, and some indicators suggest the trend may continue at least until March.

Brazilian miner Vale, the world's biggest iron ore producer, said late last week it expected to ship a record 30 million tons of ore to China in the first quarter.

"Demand (for iron ore) in China is coming back beyond previous levels...China is helping cover a lot of weakness in other markets," said Vale's director of ferrous minerals, Jose Carlos Martins.

China raised steel output by 10 percent in January from the previous month on top of a 7 percent gain in December, expecting a surge in demand in a post-Chinese New Year holiday in February, which failed to appear.

"Over the Chinese New Year trader steel inventory increased from below average to 25 percent above average. This has left inventories up 17 percent for the course of February versus the prior year," Citigroup analysts said on Tuesday.

Macquarie analysts also said in a note that steel inventory at Shanghai's warehouses surged after the new year holiday in late January.

China's increasing production and massive overcapacity is also a big threat to any global price recovery as the country ships almost a quarter of its output overseas, where demand remains poor and deep supply cutbacks are extended.

China had 660 million tons of capacity versus actual production of around 500 million tons in 2008.

Export prices of benchmark hot coil from China free on board also tumbled 12 percent to $505 a ton as major buyers struggle with high inventory, weak demand and extended output cutbacks.

Japan's steel imports dropped for the third straight month, falling 31.5 precent in January from a year ago, as automakers reduced output and reported a 28-percent drop in sales last month. Steel production from South Korea tumbled 26 percent in January from a year ago and Japan saw a 38 percent drop to 6.4 million tons, the lowest level in 40 years.