Steep steel prices on the Chinese market are forecast to continue their upward trend this year, according to an industry organization.

Domestic steel prices have shot up by an average of more than 20 percent from the end of last year, reaching a 10-year record high, said the China Steel and Iron Association.

"Steel prices will remain bullish for the whole of this year," said Qi Xiangdong, the association's deputy secretary-general.

Qi attributed the price surge largely to hikes on the international steel market as a result of the global economic recovery and skyrocketing raw material costs.

The international steel price index increased by more than 20 percent so far from last December.

Prices of raw materials, such as iron ore and coking coal, have also been soaring since last year due to the rapid expansion of the domestic steel sector's production capacity.

For example, the price of the coking coal has doubled to 1,200 yuan (US$145) per ton from last year.

"Surging steel prices will continue to significantly benefit steel makers, but will be a big headache for steel-consuming sectors this year," Qi said.

"We expect a steady growth in the profits of our steel business this year as market conditions are favorable," said Wu Jianxin, the spokesman of Shougang Group, one of China's biggest steel makers.

The profits of the Beijing-based company, which is diversifying into the high-technology sector, jumped to 590 million yuan (US$71.3 million) last year from 380 million yuan (US$45.9 million) in 2002.

China's steel sector reported profits of 5.8 billion yuan (US$700.5 million) in January, a year-on-year increase of 109 percent, he said.

The industry's profits last year doubled to 48.8 billion yuan (US$5.9 billion) from 2002.

China, which is both the world's biggest consumer and manufacturer of steel, produced 222.3 million tons of steel last year, an increase of 22.4 percent from 2002.

The nation's steel output is expected to rise to 260 million tons this year, said Qi.

But many steel-consuming sectors, such as home appliances, motorcycles and ship-building, are feeling the heat from the rising steel prices.

"We have to cut production to deal with sharp increases in steel prices," said Yin Mingshan, chairman of Lifan, a motorcycle giant based in Chongqing Municipality.

Soaring steel prices have sparked investment fever in China's steel sector since last year.

Fixed assets investment in the sector totaled 133.2 billion yuan (US$16.1 billion) last year, an increase of 87.6 percent compared to 2002, according to State Development and Reform Commission (SDRC) figures.

Overheating investment is expected to result in a massive overcapacity in steel in China.

Total annual steel production capacity will reach 330 million tons by 2005.

However, the NDRC predicts that actual domestic demand for steel will reach the level by 2010.

The central government recently called for measures to cool down overheating investment in the steel sector, as well as the aluminium, cement and real estate industries.

"The government's call is foresighted and could prevent a repeat of huge surplus in overall steel production capacity in the years to come," said Jiang Nan, a steel analyst with CITIC Securities Co, citing the steel sector's predicament from 1997 to 1999.

The sector suffered greatly from consecutive plunges in steel prices and profits because of excessive production capacity during that period.

"Domestic steel demand will continue to grow rapidly in the short term, but we do not expect this will last for a long time," said Jiang.

She called for controls on redundant low-level steel production capacity, which is both highly polluting and wastes iron ore resources, in order to ensure the sector's sustainable development.

China imported 37.2 million tons of steel last year, a year-on-year increase of 51.8 percent.

Most of the imports were high-value-added steel products which domestic companies could not satisfy the demand for, such as oil pipelines, car plates and steel used to make ships.
 
(China Daily March 10, 2004)