Uplift in China’s steel demand discounted

By Patti Waldmeir in Shanghai Published: April 21 2009 19:02 Last updated: April 21 2009 19:02 China’s steel market is likely to remain weak and prices depressed until next year, the country’s biggest steel producer said on Tuesday, in what appeared to be a warning shot to mining companies in the midst of the annual iron ore price negotiations. Wu Dongying, director of Baosteel’s Economics and Management Research Institute, said the Chinese steel industry “will remain in a valley and prices will fluctuate at a low level” in spite of Beijing’s Rmb4,000bn ($586bn) economic stimulus package, which is expected to boost steel demand in the second half. EDITOR’S CHOICE Rio Tinto stands by Chinalco deal - Apr-20Peter Hambro scraps final dividend - Apr-20Zhong Wang seeks $1.6bn in IPO - Apr-20Mr Wu comment’s, echoed by other industry executives and traders in China, came as global miners Rio Tinto, BHP Billiton and Vale of Brazil negotiate with Baosteel and the China Iron & Steel Association over the annual price of iron ore for the year which started on April 1. Iron ore is the main input into steel. Steel mills are asking for a 40-50 per cent cut in iron ore prices, arguing that steel demand is poor. The miners are resisting the call and delaying the negotiations, gambling that Beijing’s stimulus package will boost steel demand this year. Mr Wu appeared to dismiss mining industry hopes of a rebound in consumption on the back of the stimulus package. “This government investment cannot make up for the drop in private sector investment” and the decline in overseas demand that severely hit Chinese exports, he said at a conference in Shanghai organised by Steel Business Briefing, the consultancy. The Chinese steel industry sharply increased its production in the first quarter, betting that demand would recover and amid some signs of fresh buying that analysts attributed to stockpiling. Meanwhile, Mr Wu said that Chinese mills had reacted “irrationally” by boosting production when demand was weak. China produced 127m tonnes of crude steel in the first quarter, 16.6 per cent higher than the fourth quarter of last year and up 1.4 per cent year on year, according to estimates from Steel Business Briefing. Sandy Niu, a steel industry analyst at Morgan Stanley, told the conference that only the Chinese auto industry, which reported record sales in March, showed a resurgence in demand for steel. Xu Zhongbo, chief executive of Beijing Metal Consulting said that 2009 “could be the worst year in history for the Chinese steel industry because we have big overcapacity”. Ou Gouli, director of the School of Economics and Management at Beijing Jiaotong University, told the conference: “Steel prices in China are unlikely to bottom until the end of this year or early next year.” Additional reporting by Javier Blas in London