Spot and futures prices of different types of steel may have fallen in recent weeks, but analysts believe the metal will climb back up in 2011.
High iron ore costs and thinning profit margins are making it difficult for China's steel manufacturers to keep prices low. Based on the Q3 financial report of the country's 13 publicly listed steel companies, gains for the period are lower than those in Q1 and Q2.
But while several factors have pushed down steel prices in recent weeks, this is no indication the trend will continue.
With the onset of winter comes the low season for the local steel market. Dahua Futures Co. Ltd steel analyst Li Wei said this is because demand for steel products, particularly those used for construction and manufacturing, is low during the cold months. The world's three iron ore giants have all agreed to reduce costs by 10 percent in Q4 as well. Even so, Li believes prices will rebound once demand picks up in Q1 2011.
The fact that China's steel makers are sourcing more of the less expensive domestic iron ore does not necessarily mean lower prices as well. China customs statistics show that as of August 2010, imports of iron ore declined year on year. Li said that while more companies are using domestic iron ore, imported versions still account for roughly 55 percent of supply in China.
Haitong Futures metal and steel analyst Tian Gangfeng shares Li's belief that prices will bounce back in 2011. Tian said the 12th five-year plan is likely to contain provisions for continuing the implementation of the previous energy-saving and industrial structure upgrade policies. This means the steel industry's oversupply issues will still be addressed, and output will remain controlled.
Trade sanctions and the yuan's appreciation are expected to contribute to a rebound in steel prices as well. To date, the US, Canada, Europe and India have all launched anti-dumping investigations or other trade protection measures against China's steel exports.
The high cost of iron ore that is contributing to thinning margins is another factor that will prevent steel makers from sustaining low prices. Data from the CISA shows CIF prices of imported iron rose 66 percent year on year to $143 per ton in September 2010. In the same month, coke costs went up 10 percent and shipping fees grew between 15 and 40 percent.
October is generally seen as one of the best months for China's steel industry. But Peter Lin, sales director at a steel trading company, said local sales were not as good as projected, forcing a slight reduction in prices. "We cannot see a bright future," Lin said. "Demand in the domestic market is weak, export tax rebates have been cancelled and there remain problems with trade sanctions."
Despite government efforts to scale down output by 20 percent, China's steel inventory remains at a high level. The China Iron & Steel Association estimates September 2010 inventory at 14.78 million tons. With supply outstripping demand, steel makers could not increase their prices.
Note: This article "Steel prices to rebound in Q1 2011" 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.
Disclaimer: All product images are provided by the companies interviewed and are for reference purposes only. Those product images featuring products with trademarks, brand names or logos are not intended for sale. We, our affiliates, and our affiliates' respective directors, officers, employees, representatives, agents or contractors, do not accept and will not have any responsibility or liability for product images (or any part thereof) which infringe on any intellectual property or other rights of a third party.