BEIJING, Jan 21 - Chinese steel prices dipped this week amid uncertainties about lending cuts as well as perennial overcapacity concerns, but traders said the pessimism was not entirely unjustified.
Jitters about raw material prices and bulging stockpiles as well as general misgivings about monetary policy this year have all weighed on sentiment over the last week.
"These days traders are reacting to policies from the central government, and many say they are expecting steel prices and pig iron prices to fall," said a dealer based in Shanghai.
Construction steel in Shanghai on Thursday was selling at around 3,650 yuan per tonne, down 1.8 percent from last week, according to industry consultancy Mysteel.
March rebar contracts on the Shanghai Futures Exchange <SRBc3> stood at 4,218 yuan per tonne at the close of play on Wednesday, up 1 percent since the same period last week but down nearly 2 percent since Monday as the market came to terms with rumours of tightened bank lending.
"The outlook for the industry is affected by potential monetary tightening and I don't think the true impact can be seen yet," said Helen Lau, analyst with OSK Securities in Hong Kong.
The Shanghai trader said concerns that prices could soon take a bigger hit had been overstated, and he suggested that many steel traders may have taken an early holiday as China's Lunar New Year approaches, leading to a slackening of market activity.
But the issue is less about demand -- which is expected to continue rising over the year -- and more about the country's bulging supplies, which will make it harder for mills to pass on soaring raw material costs to customers.
"Even though I am quite positive about the Chinese steel sector in general for 2010, there are uncertainties about the iron ore and coking coal prices. If mills are not able to pass on costs their market will certainly be squeezed," Lau said.
PESSIMISM
Official figures released on Thursday showed that crude steel output in December reached 47.66 million tonnes, slightly higher than November, but some analysts have suggested that production does not reflect underlying demand.
"A large part of that demand generated in the last quarter, or even the second half of the year, has turned into stocks in the system," said Hubert Tang, director of equities research at UBS Securities, at a briefing on Monday.
He said the combination of tightened credit and high stockpiles would inevitably put pressure on China's steel mills over the course of the year, leading to weakening output and falling prices in the second half.
The mills themselves also appear to be revising their expectations.
Baosteel <600019.SS>, whose pricing decisions normally set the tone for the industry as a whole, surprised the market last week when it decided to hold off on planned price hikes for February -- but traders suggested the move was aimed at taking the heat out of the iron ore market before benchmark price negotiations with foreign miners begin. [ID:nTOE60E03I]
"Their decision was quite contrary to market expectations and a lot of other companies have actually increased their prices for February," said Lau.
But she said it would "not be logical" if Baosteel had delayed their price hikes for non-market reasons, especially if price talks with foreign miners are as protracted as last year's.
The company's chairman, Xu Lejiang, said at an internal meeting this week that the imbalance between output and demand was holding back prices.
"The steel sector across the whole world will probably be trapped in a low-growth period similar to the one that hit in the 1970s after the oil crisis, and the Chinese steel sector has entered into a period of low growth," he was quoted as saying by the Shanghai-based China Business News.
But despite the gloom drifting through the industry over the past week, most concede prospects still remain far healthier than last year.
"From my point of view, I can't see prices falling very much in the next few weeks and steel demand is still strong," the Shanghai-based trader said.