Baoshan Iron & Steel Co (Baosteel), the nation's largest steel mill, significantly raised its February manufacturer prices yesterday.
Major steel wire product prices went up 300 yuan per ton on average. Revised prices on major steel sheets, announced this week, are expected to increase 200 to 300 yuan per ton.
Manufacturer prices of Baosteel products range from 3,000 yuan to 6,000 yuan per ton.
The price surge on raw materials, such as iron ore and coal, led to the latest price adjustment, said Hu Kai, an analyst at Umetal.com, a steel-industry website.
According to Hu, the price of iron ore hit a 16-month high of $135 per ton, soaring nearly 120 percent from April 2009's low.
This month, manufacturer prices of Baosteel's products increased 300 yuan to 500 yuan per ton month over month, which was the first rise since September. A price increase by the Shanghai-based steel giant triggered sweeping price hikes among domestic smelters.
Last week, Jiangsu Shagang Group raised its price by 200 yuan per ton, while Xinjiang Bayi Iron & Steel Group, Jiuquan Iron & Steel Group, Laigang Group and Guangxi Liuzhou Iron & Steel all increased their prices by approximately 150 yuan.
But analysts say the price surge won't impact Baosteel's sales, as market demand in downstream sectors like autos, real estate and home appliances remains robust.
China's passenger car sales climbed to 13.5 million units in 2009 and outnumbered the 10 million units sold in the US, becoming both the world's largest auto consumer and producer.
In the property market, house prices in major cities increased 30 percent year-on- year in 2009. The robust growth of the two industries helped secure steelmakers' profits.
According to Hu, in the first half of 2010, domestic steel mills can still expect to turn a handsome profit as the economy continues its recovery, but the second half may hold uncertainties.
"This year's iron ore price is likely to jump 35 percent, which will erode profit margins at many steel producers," Hu said.
Shares of Baosteel plunged 3.78 percent to close at 8.66 yuan yesterday after the central government announced it would increase the reserve requirement ratio of banks.
"Baosteel's share price decline is closely related to Tuesday's policy change by the People's Bank of China, which increased banks' reserve requirement ratio by 50 basis points. The policy is to take effective on Jan 18," said Zhu Limin, an industrial analyst at Shanghai Securities.
Mainland shares fell sharply yesterday. The Shanghai Composite Index dropped 101.31, or 3.09 percent, to 3172.66 points, and the Shenzhen Component Index fell 364.69, or 2.73 percent, to 13016.56.
Baosteel's share slide is also tied to Morgan Stanley's rating downgrade. The accounting agency cut its rating on the steel maker from "overweight" to "equal weight".
"Baosteel's current contract prices are near a record high premium on both spot pricing and other regional producer contract prices, such as China Steel Corp.
Baosteel's shares have rallied 45 percent in the past three months, strongly outperforming its regional peers," said Morgan Stanley, maintaining an 8.5 yuan share price estimate.