The sharp fall in commodity prices in the recent months has caught many domestic enterprises off guard.

But even the veteran investors familiar with China's unpredictable corporate scene were surprised at the estimated losses of Baosteel due to misjudgments in the violent price swings of nickel, a key ingredient in steel production.

"Each ton of stainless steel requires at least 80 kg of nickel. With nickel prices peaking, the steel industry can hardly operate as the cost is too high for us," said Xu Lejiang, president, Baosteel, at a recent forum in May.

Unconfirmed news reports of such losses in the local press have raised deep concern, but Baosteel shares have bucked the trend and risen nearly 9.57 percent in the past one week to close at 6.87 yuan yesterday.

The Chinese-language weekly, 21st Century Business Herald, for instance, said the Shanghai-based steel group has lost roughly 1 billion yuan in nickel hedging deals last year.

Chen Ying, board secretary with Baosteel, did not directly deny the losses, but questioned the "authenticity" of its sources. "I think the story must be based on wrong sources," she said.

Although persistent rumors of such losses have depressed the company's shares, Chen said a written clarification to the exchange was unnecessary as that would lead to more market unrest.

Shares of Baosteel moved up 1.35 percent to 6.74 yuan on Monday, but turnover shrank by 38.9 percent to 859.9 million yuan. The turnover returned to 1 billion yuan again yesterday and share prices surged by 1.93 percent to 6.87 yuan.

Analysts said it was normal for large producers like Baosteel to hedge against escalating prices of raw materials. Like some other Chinese enterprises, the airlines included, Baosteel seemed to have got the timing wrong, analysts said.

Nickel prices have fallen on the London Metal Exchange (LME) by nearly 63.16 percent. Prices fell from a high of $23,900 per ton in June 2008 to around $8,805 per ton in October and recovered to $14,600 per ton on June 5 this year.

"I cannot explain why nickel prices have been fluctuating wildly in the last two years," said Xu.

Analysts, however, said the hedging losses had not made much of a dent on company fortunes as demand for steel is influenced by the overall health of the economy.

The steelmaker's inventory has decreased to 29.2 billion yuan by the end of the first quarter, a drop of 17.98 percent from 2008.

Over the first quarter, the company produced 4.72 million tons of iron and 5.13 million tons of steel, making a combined profit of 140 million yuan, a drop of 5.16 billion yuan from the same period last year, but an increase of 8.47 billion yuan over the last quarter.

Zheng Dong, analyst, Guosen Securities, said the wrong bets on nickel hedging deals could be a disaster for small steel firms, but not that great a blow for Baosteel.

"Baosteel still makes profit from other investment avenues," Zheng said. According to Zheng, there is an investment company under Baosteel that manages securities, banking, and insurance, and it has been operating well till now.

"It's somewhat like the mode of General Electric, which diversifies its investment to many high-growth sectors," he said.

Baosteel is not the first firm to be caught on the wrong side of hedging. Jiangxi Copper burnt its fingers on copper futures, while Zhuzhou Smelter had a bitter experience with zinc, analysts said.

The steel industry reported an aggregate loss of 3.308 billion yuan in the first quarter. Baosteel posted a net profit of 140 million yuan during the same period, a 98 percent year-on-year fall.

(China Daily June 10, 2009)