China stainless steelmakers face dim Q4 demand

SHANGHAI Dec 5 (Reuters) - Stainless steelmakers in China, the world's largest producer, are cutting production and building stockpiles in the fourth quarter due to lower overseas demand, industry sources said.

They added that domestic customers were having difficulty obtaining credit to buy stainless steel.

Chinese stainless steel prices are set to fall further in the first quarter of next year due to expected oversupply, as Beijing is likely to remove a 5 percent rebate on exports of some stainless steel products.

Taiyuan Iron and Steel Group, China's largest stainless steel mill and parent of Shanxi Taigang Stainless Steel Co 000825.SS, has lowered its production target for 2007 to 2.08 million tonnes, from 2.3 million tonnes set early this year, due to poor sales, a company source said.

"We planned to prevent the stainless steel prices from falling, but the market reacted little. Downstream customers are standing aside, waiting and watching," the Taigang sales manager said on Wednesday.

Sources believed that steel mills prefer to build stocks rather than cut output sharply, even though volatile international nickel prices MNI3 have hurt profits.

They are poised to sell as soon as prices strengthen in the slightest, thus capping any potential for prices to rise in the near future.

"It is reported that China's total stainless steel stockpiles have reached 150,000 tonnes, about one-tenth of Baosteel's annual production. That's amazing," one trader said.

SHORING UP THE MARKET

Taigang will cut sales volume of major stainless steel products by 30 percent in December compared with November, after cutting sales by 20 percent each in October and November, in order to buoy domestic prices, a company source said.

Prices of the popular 300-series cold-rolled stainless steel have been stable at about 30,000 yuan ($4,058) a tonne for weeks in China, compared with about 50,000 yuan a tonne in May, when nickel futures hit an all-time high of $51,800 a tonne.

Baoshan Iron and Steel Corp. (600019.SS) has cut sales volumes by about 50 percent compared with earlier this year, after its third quarter profit halved due to weaker stainless steel product prices.

Baosteel, China's second largest producer, lowered stainless steel production by 50 percent in November to carry out annual facility maintenance, a company official said on Wednesday. It increased some carbon steel output during the period.

Chinese units of South Korea's POSCO (005490.KS) have suspended purchases of nickel in recent weeks, due to low demand for products, a trader close to the company said.

"Nobody wants to buy much. Everyone is being pushed to pay back bank loans," said an official with a fabricator located in eastern China's Jiangsu Province.

The official said that his company received 20 to 30 percent fewer orders for products like pipes and home appliances from the U.S. in November and December.

Traders and company sources said the decrease in the sales volumes would not directly lead to major production cuts at Chinese stainless steel mills, as steelmakers are still seeking to dump their products into the market in "profitable periods."

The domestic market could get tougher early next year, because prices will lose more fundamental support if China removes the tax rebate on some stainless steel products exports starting Jan. 1, 2008.

"I am very concerned about the tax rebate cut, as that could mean a start of serious price wars among Chinese stainless steel makers," the Taigang official said.

($1=7.392 Yuan)

(Editing by Lucy Hornby and Peter Blackburn)