After falling for two consecutive weeks, steel prices are now on the rebound. But low margins and high costs leave China's consumer goods makers little choice but to raise export quotes.
Prices of various types of steel in China have bounced back recently, buoyed by the expectations of high consumption in the weeks ahead. Consequently, China manufacturers of steel-based products are likely to boost export prices this year.
In China, demand for steel is fueled mainly by high usage in the domestic market. With global economies continuing to recover, orders for steel-based finished goods have also been going up, particularly for home appliances and hardware products. The earthquake in Japan, meanwhile, is likely to affect global steel supply, particularly since the world's seventh and eighth-largest makers, Nippon Steel and JFE, had to suspend some production.
Suppliers of consumer goods, however, find it difficult to absorb rising steel costs and would have to boost export prices with every increase in metal quotes. The Midea Group, for instance, is likely to raise quotes for its air conditioners. This is because steel accounts for 20 percent of the total cost per unit. But the rate of increase will be different per product line, and may range from $10 to $30.
Steel is a major material for washing machines as well. An 8.6kg twin-tub model, for instance, uses 6kg of cold-rolled steel sheets. A 7kg front loader employs roughly 10kg of cold-rolled steel sheets. Billy Chai, foreign trade sales representative at Cixi City Chenyang Electric Co. Ltd, said the company may increase export prices 1 percent for every 10 percent rise in steel costs.
Instead of simply adjusting quotes, some suppliers are adding more value in their releases. Guangdong Vanward Group Co. Ltd has been developing multifunction barbecue grills as a way to convince buyers to accept higher prices.
But this route is not possible for all makers, particularly for a few hardware companies. Stainless steel pipe and fitting manufacturer Wenzhou Yonghao Stainless Steel Pipe Co. Ltd said its products have to comply with standards. It is not easy for the company to modify designs or use alternatives to steel, which account for 60 to 90 percent of unit costs.
By the end of February 2011, steel prices in China hovered between 4,800 and 5,600 yuan ($730 to $850). Quotes had been increasing by 100 to 200 yuan ($15 to $30) per month over the past year.
The high cost of iron ore was the main factor behind the continuous price adjustments. In anticipation of high steel demand from China, particularly in high-speed railway, automobile and construction industries, major suppliers such as BHP Billiton planned iron ore cost increases for the months ahead. But demand fell short of projections. As a result, steel prices were down for the first two weeks of March 2011.
The earthquake that devastated Japan on March 11, however, has forced Nippon Steel and JFE to shut down some operations. Haitong Futures analyst Tian Gangfeng said it can take between three and six months before steel production in Japan can normalize. Tian also believes steel buyers are likely to turn to China and South Korea for their requirements.
In addition, Australia will enact new resource tax legislation next year which may affect prices further.
As a result, China steel prices have started climbing back up again. Recent data show that the Chinese Long Product Price Index (CLPPI) rose 16 points on March 15 to 7345, while the Chinese Flat Product Price Index (CFPPI) went up 14 points to 7384.
China's steel factories, meanwhile, no longer have the power to negotiate quotes. In the past, contracts for iron ore prices are set on an annual basis. But in 2010, iron ore suppliers were able to convince steel manufacturers in China to accept quarterly pricing. This year, contracts have been shortened further to just one month.
Tian said China's steel makers have little room to absorb additional costs and would have to implement commensurate quote increases alongside iron ore price hikes.
Note: This article "Steel cost hikes lift export prices" was originally published by Global Sources, a leading business-to-business media company and a primary facilitator of trade with China manufacturers and India suppliers, providing essential sourcing information to volume buyers through our e-magazines, trade shows and industry research.
All price quotes in this report are in US dollars unless otherwise specified. FOB prices were provided by the companies interviewed only as reference prices at the time of interview and may have changed.
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