It is quoted from Shan Shanghua, secretary-general of the China Iron & Steel Association Friday that steel prices in China started to plunge last week after rising for 17 straight weeks and such price fall was totally attributed to overcapacity.

Steel prices will go downward in the second half of this year if capacities continue to expand, added Shan.

By August 19, prices of the domestic mainstream steel products had slumped 550-950 yuan/ton or about 20 percent since last week.

However, some market analysts hold that in the usually slack season for steel industry in July and August, the price fall was just a normal adjustment from a sharp rise in the earlier period.

Steel prices are expected to halt dropping in September and steel enterprises’ performance in the second half may be better than that in the first half thanks to rising demand from the real estate sector, they point out.

During the period from April to early August, prices of main steel products in China soared nearly 30 percent over this year’s valley. An analyst with CBI China said that the government’s four-trillion-yuan stimulus package, which was launched in the fourth quarter of last year, began to boost steel demand from the second quarter this year. Therefore, steel enterprises’ stocks kept falling in the March-May period and steel prices started rising from mid-April.

“In the June-July period, the domestic steel output grew too fast, far surpassing the market demand,” Shan noted. Meanwhile, lots of intermediary traders largely added stocks on speculation that the price would rise higher.
“Now traders begin to sell out their stocks, but market doesn’t have so much demand”, Shan added.

Statistics from CISA show that stocks of steel products posted a month-on-month rise in July after decline for four consecutive months.

Currently, some steel products’ ex-factory prices are higher than spot prices, with the price gap as wide as 1,700 yuan/ton. A researcher with China’s leading steel producer Baosteel said that the steel demand from downstream industries are inadequate to support the high price, which will force steel enterprises to cut their prices.

Shan still held unoptimistic outlook for the domestic steel market in the following period, saying that steel prices can hardly go up in the second half if capacities maintain at such a high level.

With price rise of raw materials such as iron ore and coke, the steel production cost is also increasing to squeeze steel enterprises’ profits, Shan said, adding that large steel plants’ steel businesses still incurred losses in the first seven months and most of their profits came from investment return.

However, according to Ding, steel prices had surged for more than three months, so it’s normal for them to slip back. The steel industry will enter the traditional peak season in the September-October period and steel prices have a 20-30 percent rising room, he said.

The CBI analyst predicted that steel enterprises’ profits will climb in the second half as steel exports are likely to warm up.

A CBI survey showed that orders for steel products from overseas have increased prominently from June, with the quoted price also on a rise.

It is reported that China (its major ports), the world’s biggest iron ore buyer unloaded 35 percent more of the steelmaking ingredient last month from a year ago.

Ships unloaded 56.5 million metric tons of iron ore in July at major ports, the Ministry of Transport said on its Web site. The ministry didn’t provide comparative figures.

Crude steel output in China jumped to a record in the first half and cash iron ore prices have gained 33 percent this year as a $585 billion stimulus by the government improves building demand and auto purchases. The China Iron & Steel Association has blamed traders for the rising imports, which have hurt its ability to negotiate for lower contract prices.

“The increase in iron ore imports in July was partly boosted by small steelmakers buying ore at lower spot prices,” said Roslyn Ji, an analyst at Core Pacific-Yamaichi International Holding in Beijing.

Spot iron ore prices traded at $95.30 a ton yesterday according to the Steel Index. They averaged $83.436 a ton in July. Chinese steelmakers are stalled in talks to agree on benchmark contract prices with suppliers Rio Tinto Group, BHP Billiton Ltd. and Vale SA. The mills buy ore from mines in Australia, Brazil and India.

Record ImportsIron ore imports hit a record 57 million tons in April, according to general customs. Imports by traders accounted for 44 percent of purchases in the first half, the steel association said last week, compared with 30 percent a year earlier.

“In the second half, China may cut its reliance on imports because higher prices may prompt mills to use domestic ore,” said Umetal Research Institute analyst Du Wei.

Container volumes handled by major Chinese ports fell 3.8 percent to 10.1 million 20-foot standard containers, the transport ministry also said today. That’s the lowest level of decline this year.

“China container traffic, relying mostly on exports to the U.S. and Europe, still needs time for a full recovery,” said Core Pacific-Yamaichi’s Ji.

Former Federal Reserve Chairman Alan Greenspan said Aug. 2 that U.S. economic growth may resume at a rate faster than most economists forecast.

It is also said from the ministry that total cargo volumes at the ports rose 13 percent to 500 million metric tons in July from a year ago.

According to Luo Bingsheng, executive vice president of the association, China Iron and Steel Association (CISA) will push forward the iron ore import registration system, as an effort to curb the flow of imported iron ores to high polluting enterprises with backward production capacity.

The association’s latest data show that China imported 297 million tons of iron ores during the first half of 2009, up 29.3 percent from a year earlier. Those imported by trading companies reached 131 million tons, accounting for 43.96 percent of the total iron ore imports, higher than 29.83 percent during the first half of 2008.

China has 112 companies qualified for importing iron ores, but actually 152 companies were engaged in such business, according to the association.

According to statistics released by the National Bureau of Statistics, iron ores used in pig iron production increased 21.55 million tons during the year’s first half, while iron ore imports rose by 67.33 million tons. Obviously, the imports were highly above production demand, which led to large iron ore inventory in ports and high demurrage charges and ocean freight.

The large iron ore imports by trading companies has resulted in over imports and distorted the relationship between domestic iron ore supply and demand, and it was disturbing for the on-going iron ore price negotiation.

Luo said that China would strictly implement the iron ore import agency system. At the same time, it would adopt a uniform price in accordance with the negotiation results, to avoid the risk of speculation on different prices for one product.

Luo called on the government to encourage domestic iron ore exploitation, to ensure supply to the domestic market.

As for the highly concerned iron ore price negotiation, Luo said that it was still in progress.

Companhia Vale do Rio Doce, Brazil’s leading metals and mining company, said last Friday that it would not reach any price agreement with China before completion of price negotiation between China and Australia’s BHP Billiton Ltd. and Rio Tinto.

It is announced from BHP Billiton last week that it has reached an annual contract price with clients on 23 percent of its iron ores and a mixed contract price on 30 percent of its iron ores, leaving the rest 47 percent still under price negotiation.

It is determined that CHINA wants all of the country’s steel makers to accept a single ore import price once the price for this year.

The measure aims to regulate excess iron ore imports by small steel makers and intermediary traders, which have hampered ore negotiations by creating unnecessary demand.

The China Iron and Steel Association has proposed an import system to force traders and mills to buy ore at a unified benchmark price agreed with foreign miners, and traders could charge a 3-to-5-percent fee for resale, Luo Bingsheng, vice chairman of the CISA, said yesterday.

The steel industry group said foreign miners are encouraging spot sales to China, leading to excess imports and distorting China’s actual demand. Spot imports account for 83 percent of China’s ore purchase so far this year, it said. The country’s iron ore imports surged 29 percent in the first half, mainly driven by speculative buying from smaller mills and trading companies in recent months.

China’s negotiation position has been hurt by rising spot ore prices, which were below contract prices in May when Japan first accepted the 33-percent cut but have now exceeded them.

The CISA also expects a “reasonable” solution in the protracted iron ore price negotiations with global miners while it blamed speculative trading for hindering the talks.

“We hope to see a reasonable result,” Luo said at a press briefing yesterday in Beijing, adding China is seeking a win-win agreement.

The CISA, China’s lead negotiator this year, is locked in the talks as it demands a deeper cut in term prices after major Japanese and South Korean steel mills accepted a 33-percent reduction offered by Australia’s Rio Tinto, the world’s second-largest iron ore miner.

The talks, originally meant to set prices for the year starting April, had missed a key June 30 deadline, with some Chinese mills already agreeing to a temporary 33-percent cut.

BHP Billiton, the world’s No. 3 ore producer, this week said it has agreed to sell 30 percent of its volume for this year on a combination of quarterly negotiated pricing, spot market and index-based pricing, but only settled 23 percent of volume at annual contract prices.

It is reported that China Iron & Steel Association (CISA) Tuesday denied media reports that it had decided to suspend price negotiations with Australian iron ore giants Rio Tinto and BHP Billiton. It said speculative behaviour in the spot market had led to high price rises, forcing it to suspend the negotiations with Australia’s Rio Tinto and BHP Billiton.

Media reports said Monday that CISA decided to temporarily suspend the on-going iron ore price talks to evade unreasonable interruptions from the spot market where iron ore prices have been distorted.

But CISA refuted the above reports, saying that it never released such a statement and that its talks with Rio Tinto and BHP Billiton are underway.

Xu Zhongbo, a professor of the University of Science & Technology Beijing, noted that the iron ore price talks going on between CISA and Australian iron ore suppliers have entered into the most challenging period. It’s unlikely, said Xu, that any agreement can be produced in the short term.

Steel spot prices both on the domestic and international markets are currently surging, driving up steel production and subsequently iron ore demand.

However, Chinese steel plants may begin cutting output from the fourth quarter due to possibly arisen faltered steel demand, which may favor China in the iron ore price negotiations, Xu added.