THE fall in steel prices in China, which started in the third quarter, may continue due to weakening demand despite higher costs and production limits, analysts say.
This correction could well last for a while even after the lean consumption season, further cutting into margins in the steel industry.
Domestic steel prices have soared 23 percent this year to a record level in early June, as mills raised prices to counter higher raw material costs and energy bills, taking advantage of the robust demand.
But they started to fall sharply since the last quarter with prices over 30 percent lower than the June peak and posting the largest weekly decline in eight years last week.
"Now we believe demand has become the main factor affecting the industry cycle of the steel sector," Changjiang Securities analyst Liu Yuanrui said in a report, adding that demand has slowed down in sectors ranging from property and machinery manufacturing to automotive and home appliance makers.
Lean season
"History tells us in a lean season, falling demand always has a bigger impact than supply constraints do."
Maanshan Iron & Steel Co, the first major Chinese mill to report quarterly results, said on Tuesday third-quarter earnings were 786.7 million yuan (US$115 million), down 47 percent from the previous quarter, albeit 56 percent up in annualized terms because of a smaller year-earlier base.
The Anhui Province-based company cited the deepening global credit crunch and slower domestic fixed asset investment as the reason for the weak steel market, and expected the decrease in demand to "continue for a period of time."
Shenyin Wanguo Securities analyst Wang Shijie said market confidence in the steel sector may not recover over the next three months at least, against a backdrop of falling prices, and said Maanshan Steel is facing an even tougher fourth quarter ahead when it may even post a loss.
China also reported on Tuesday that steel product exports fell to 6.67 million tons last month, the lowest in three, from 7.68 million tons in August. UBS analyst Hubert Tang said the fall, despite a rising price gap between higher exports and a lower domestic market, indicated that a "weakening overseas demand now takes control" in China's exports, as the credit crisis spreads across the globe.
Weakening demand has started to upset production in China, which accounts for a third of global output, with month-on-month domestic crude steel production growth falling in July and August.
The falling steel prices have also led to weaker prices for raw materials like iron ore and coking coal, and a substantial plunge in international freight rates which China buyers pay for shipping in their import ores. Coking coal is used to make coke, another ingredient in steel making.
"The declining ore prices may be because of the earlier overestimation of the steel demand growth, but the falling coke prices tells a clear truth that demand from steel furnaces is falling," Chiangjiang's Liu said.
Import reliant
China relies on imports for over half of its iron ore demand, while for coke it remains an exporter.
The steel industry has started to feel the pinch, with profit margins at large and medium-sized mills falling to the lowest level since March 2006, and there are signs of a further drop, Changjiang said.
Other Chinese steel companies including Baoshan Iron & Steel Co and Angang Steel Co are set to report third-quarter earnings later this month.
A declining period for steel prices would typically last five quarters, Changjiang said. Although domestic prices still rose on yearly basis over the past months, the securities firm said the October figures it has seen so far have shown prices may fall this month in annualized terms, which would confirm a downturn correction for prices in the sector.
"When steel companies started to lower prices significantly, the moves made traders eager to sell their products while cutting orders, adding pressure to the sales people at the steel mills," said a Shanghai-based trader. "The mood in the traders" sector is not that stable now, although some steel makers' plans to cut production to support prices may help regain some confidence."