China Fears Disastrous Steel Oversupply

BEIJING, May 8 -- Reuters reported that China's steelmakers are facing low demand and potentially disastrous oversupply, supporting their insistence on a 40 percent cut in benchmark iron ore prices.

    China's steel industry, the world's biggest, traditionally sets a global benchmark each year after lengthy talks with three miners that dominate the iron ore trade: Vale, Rio Tinto and BHP Billiton.

    Shan Shanghua, secretary general of the China Iron and Steel Association said the buyers had more power this year because of too much supply and too little demand. He said that "I have not seen any fundamentals to support a sustainable steel price recovery. Major steel mills have cut their production of steel coil remarkably in China and steel mills have already seen their exports falling sharply."

    Shan said output levels were being driven by a blind rush back to production by small mills and would not continue for the rest of the year as the weak market would force more cutbacks. He said that "We are still aiming at a yearly production of 460 million tonnes. Whether we can make it or not depends on exports and domestic demand. But I am sure that if we remain at that high production rate and do not cut output, it will be a disaster."

    Shan said the Chinese, led in the negotiations by Baosteel, should be able to get a price below the spot market, which would mean a cut of more than 30%. He said that "There is a common sense that wholesale prices should always be lower than those for retail."

    Shan said some Chinese regions have cut taxes and the fees they charge miners in order to lighten the burden and support sales of domestic ore. He said that but China is unlikely to reduce a 17% value-added tax on domestic iron ore in an attempt to undercut imports. He added that "I've never heard of such plans and I think it sounds unlikely to me as changing VAT policy is a big move that the government is always extremely cautious about."

    Shan said CISA was still opposed to the idea of switching to an index system for iron ore prices, as only long-term agreements could foster development in both the steel and mining sectors.

    (Source: Reuters)