Domestic steel prices have increased for 12 consecutive weeks since mid-November 2008, according to statistics from steel consultancy website mysteel.com.
"Prices of steel products have increased continuously since November backed by the resilient demand from downstream industries," said Zhang Tieshan, an analyst with mysteel.com.
Prices of around 30 categories of steel products have staged a rebound from November onwards after bottoming out.
The average price of deformed steel soared from 3,550 yuan ($519.16) per ton on Oct 17, 2008 to 3,990 yuan this week, up 12.4 percent. Prices of hot-rolled steel rose 10.6 percent during the same period from 3,770 yuan to 4,170 yuan. Almost all the steel products reported a price hike over the past three months, said Zhang.
One parameter leading to the price surge is shrinking steel supply as domestic steel mills slashed output in the second half of last year. Due to the sluggish market demand steelmaker Baosteel has kept its six blast furnaces idle since October.
China's steel mills have been running only to 60 to 70 percent of their full capacity in the past few months creating a balanced supply-to-demand ratio, said Zhu Limin, analyst, Shanghai Securities.
The 4-trillion yuan stimulus package has also started to take effect. The package focusing on infrastructure projects like railways and highways will greatly boost the steel industry, said Zhu.
"We have not figured out the entire demand of steel that comes from the stimulus package, but through a project-by-project estimation of steel demand, 2 trillion yuan will be used for mass construction and is expected to generate more than 20 million tons of demand," said Zhang.
Adding the additional 100 billion yuan of investment announced by the end of 2008, a record demand for steel is likely, said Zhu.
He also attributed the steel price hike to the rising shipping costs, increasing raw material prices such as coke and shredded scrap.
But analysts said a price drop was in the perspective as soon as the annual iron ore price negotiations are finished. "Once the negotiators strike a deal, steel prices are expected to fall as the global recession is wiping out potential steel demand as well as excess credit," said Zhu.
This year's prices would in all probability return to 2007 levels, representing a 40 to 50 percent price drop from last year, he said.
According to analysts, an agreement on iron ore price reduction by 41 percent for 2009 between Russian steelmaker Magnitogorsk Iron and Steel Works (MMK) and Eurasian Natural Resources Corporation (ENRC) of Kazakhstan in January has forced China to take a similar stance in the ongoing iron ore negotiation.
"We may not be able to demand a price drop as much as MMK did, but we do deserve a broad price cut," said Zhang.
The demand brought by the 4-trillion yuan stimulus package could also be diluted by export uncertainties. Last year, China exported 40 million tons of steel, almost the same quantity the overall stimulus package would boost.
Once the Chinese steel mills enhance their output, the current balance between supply and demand would no longer exist, and the price rise will end, said Zhang.