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Analysts: Oversupply may buck steel price rally

By Ding Qi (chinadaily.com.cn)
Updated: 2009-06-18 16:45

China's steel prices have recently rallied notably, boosted by the government's stimulus package and a recovery of the property markets. However, given the industry's excessive capacity and uncertain economic prospects, analysts predict the bullish price trend will soon decline.

China Securities Journal Thursday quoted statistics from Mysteel, an industry web portal, which said that as of June 17, domestic steel prices have rallied for a ninth week in a row. Prices last week increased 2.9 percent from May avearge.

Meanwhile, the benchmark reinforcement steel bar contract traded on Shanghai Futures Exchange touched the year's peak of 3,940 yuan per ton last week, an increase of 400 yuan from the contract's debut price on March 27.

The rallying prices largely benefit from new orders of the real estate sector and infrastructure projects from the nation's 4-trillion-yuan stimulus package, analysts said.

Related readings:  Steel price hikes not large enough to trigger new capacity  Rolled steel price to drop this year  Various factors lead to steel price plunge  China takes measures to rally steel price

Data from China Iron and Steel Association (CISA) showed China's social inventory of construction-use steel dropped notably in recent months. Inventory of reinforcement bars and wire rods decreased by 5.59 percent and 14.81 percent respectively in May from the previous month.

However, insiders of the steel industry are not too optimistic about the future. In a report released Wednesday, CISA warned that some steel products such as hot rolled coil and thick steel plate have seen obvious oversupply.

CISA called on steel mills to make production plans based on market conditions and to refrain from over expansion in capacity.

Mysteel analyst Xu Xiangchun said that China's steel prices will meet supply pressures soon and may turn down some time in the second half of this year, adding that the overcapacity problem will become a constant factor suppressing prices in the future.

Wu Dongying, a steel expert from Baosteel Group, China's flagship steel maker, said poor capacity utilization is a major headache for China's steel industry. According to Wu, China's annual capacity of crude steel totals 660 million tons, while the apparent consumption (production plus net imports and inventory adjustments) is forecast to be merely 430 million tons this year.

Wu said the disorderly unleash of capacity amid price rallies will make the oversupply problem even worse. Meanwhile, demand of high-end steel products remained weak, while that of low-end products was dragged by infrastructure investments, making restructuring of the industry's product make-up even harder in the near future.