More Chinese Steel Mills Cut Output But Impact Seen Limited
Tuesday October 7th, 2008 / 10h26
SHANGHAI -(Dow Jones)- Tumbling steel prices and high production costs have forced more Chinese steel mills to formalize production cuts that have been talked about for a while, but analysts are skeptical the highly fragmented industry will manage to ensure a coordinated supply response to the current weakness in demand and prices. China's Shandong Iron & Steel Group Co., Hebei Iron & Steel Group Co., Shougang Corp. and Anyang Iron & Steel Group Co. have agreed to cut production by 20% from October, market participants told Dow Jones Newswires Tuesday. The decision was formalized at a meeting of representatives from the four mills last week, they said. Together, they produced around 77 million tons of crude steel in 2007, accounting for 16% of China's total steel output. An official with Shougang Corp. said the company was still drafting the plan and as such couldn't provide further details of production cuts at this stage. Steel prices in China have fallen by more than 20% from the record highs in early June, mainly because of shrinking downstream demand. Prices of some products, such as hot-rolled coils, have already fallen below the cost of production for many mills, traders said. Some of the smaller producers in China had begun cutting output as early as August. "Sales are slowing and stockpiles are high, so output cut is a reasonable choice," said Xu Xiangchun, an analyst with steel consultancy Mysteel. However, Xu added it's hard to say how much production will actually be lost, as a highly fragmented industry means market share would be a major concern for producers. The plan to cut production comes at a time when major Chinese steel producers are engaged in midyear iron ore price negotiations with Brazilian miner Companhia Vale Do Rio Doce (RIO), or Vale. In an unusual move, Vale had earlier sought a midyear hike of about 11% in long-term supply prices. But slowing domestic demand in China may make it difficult for Vale to push through with the price rise it is seeking. "Given the high stockpile of iron ore at ports and shrinking steel demand and profit margins, mills can replace part of the Brazilian ores," with supply from other origins, said Zhang Ping, an analyst with metals consultancy Umetal.com. Vale's request for a price adjustment from September was aimed at bring its prices for Asian buyers in line with those offered to its European clients. The Brazilian mining firm said prices for Asian clients are 11.0%-11.5% lower than those for Europe, depending on the grade. In yearly negotiations with Chinese mills earlier, Vale had agreed for a lower price increase in 2008 compared to those achieved by competitors such as BHP Billiton Ltd. (BHP) and Rio Tinto Ltd. (RIO.AU) -Helen Sun in Shanghai and Juan Chen in Beijing contributed to this article; Dow Jones Newswires; (86-21) 6120-1200; helen.sun@dowjones.com Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary: http://www.djnewsplus.com/al?rnd=SeIg8G7yNMkWwEGTEPV1HQ%3D%3D. You can use this link on the day this article is published and the following day.
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