SHANGHAI, Mar. 22 (SMM) -- Last week, distributors in Hangzhou requested Shasteel subsidy them for February prices after Shasteel adjusted March prices to close to market prices. The distributors also refused to pay for goods and stopped selling goods from Shasteel. Distributors in Wuxi and Ningbo also followed the actions of Hangzhou distributors and asked Shagang Group and Jiangyin Changda Iron and Steel to make up for their losses after price adjustments.

Shagang Group raised steel prices by RMB 200/mt just before steel markets closed for the Chinese New Year holiday, but actual steel prices remained below market expectations, which caused losses for traders. Actually, steel mills and traders have had disagreements in the past, but the discord this time was particularly strong. Steelease believes distributors had found ways to offset losses in the past, but this time traders were under greater cash flow pressures since financing of steel traders was now coming under much greater scrutiny.

Due to over capacity, competition within China’s iron and steel industry has become more severe. Steel mills have always had a stronger hand in negotiations with traders, but the actions by Shagang unexpectedly united the traders in Hangzhou, which may alter the balance of power in future negotiations.

Steelease still believes profits at traders will grow following the recent steel price increases for a number of reasons. First, demand from downstream sectors is increasing, pushing up steel prices. Steel mill ex-works prices usually lag behind market prices, which helps increase profits at trades during the time lag. Second, since steel mills have largely been consuming high-priced iron ore purchased earlier, production costs are now preventing steel prices from falling. However, since iron ore prices have recently fallen, lower production costs at steel mills allow steel mills some room in providing subsidies to traders.