Chinese steel traders seek rebates from mills amid tepid demand
* Traders hit by losses as steel inventories at record high
* Mills rely heavily on traders to sell products
* Without traders, China mills face greater cashflow risk
By Ruby Lian
SINGAPORE, March 28 (Reuters) - Burdened with massive stockpiles of steel and slowing demand growth, some loss-making Chinese traders have asked mills for rebates on metal that has fallen in value since they bought it.
The requests, made in letters seen by Reuters, illustrate the strain of lower prices and slower growth on the steel supply chain in China, which produces half the world's steel. About 90 percent of mills in the country rely on traders to sell their products.
If the role of traders changes, mills could see their cashflow impacted. Traders pay mills in full ahead of their purchases, while at the same time offering credit to consumers such as property developers. As such, traders ease the cashflow-burden on both steel producers and users.
As Chinese demand growth has slowed along with a tepid economic recovery, traders have been stuck with record-high inventories that have drained their cash. Now, facing a loss on the value of those stockpiles, they want some money back from the mills.
"If traders leave the supply chain (because of steep losses), all pressure from sales, renting warehouses, stockpiling fees and capital costs will go to mills themselves," said Qiu Yuecheng, an analyst with Xiben New Line Co Ltd, a steel trading platform in Shanghai.
Steel traders in Hangzhou, one of the biggest steel trading centres in China, wrote to Jiangsu Shagang Group twice this month, requesting rebates for previous orders and lower prices for new bookings. They said they had incurred losses since February due to falling steel prices and weak sales, according to copies of the letters.
"Steel mills use every possible method to transfer their surging costs to end-users through traders. But the end-users refuse to accept the extra cost due to weaker demand, so it's the traders who end up incurring losses," Huang Yingjie, a veteran steel trader and deputy chairman of the Hangzhou Steel Traders Industry Association, told Reuters.
"The current purchase mechanism was formed because traders were able to push up prices when there was a supply shortage and this has been challenged now and a new booking pattern is needed."
Shagang, China's largest privately owned steelmaker, usually sets prices for long steel products like rebar and wire rod, used in construction.
Traders said the company had cut rebar prices by more than 300 yuan ($48) to 3,720 yuan per tonne and wire rod by 200 yuan to 3,800 yuan per tonne since mid-March in response to their requests.
Sales officials at Shagang could not immediately be reached for comment.
'TOUGHER THAN EVER'
Most Chinese steel mills rely on traders to help distribute their steel products to manage costs mostly inflated by labour, lending and key raw material iron ore.
Traders from other regions, including the top steel trading city of Wuxi as well as western Chengdu, have also asked mills to drop prices and threatened to stop buying if their requests are not met, according to copies of letters they sent.
"We have cut our contract volume (with mills) by half this year as business is tougher than ever, while mills still ask us for full payment for bookings," said a Shanghai trader who buys from mills in the eastern Shandong province.
China's crackdown on lending last year shuttered thousands of steel trading firms who failed to repay loans as a slower economy dented steel appetite.
To cut their reliance on trading firms, some mills like Hebei Steel, China's largest steel producer, and smaller private Guofeng Iron & Steel have set up sales teams in big cities this year, Xiben New Line's Qiu said.
A few mills have started paying traders on a fixed commission basis, or only for a particular volume of products sold, while some are adjusting their pricing more frequently, traders said.
Beijing's renewed push to cool housing prices has also dented the outlook for steel consumption. The property sector uses about a third of China's steel products.
China's daily crude steel output hit a record 2.21 million tonnes in February as mills ramped up production in anticipation of demand that typically picks up from March onwards when construction activity resumes from the winter lull.
But slack demand lifted stockpiles of steel products held by traders to 22.51 million tonnes by March 15, while similar inventories at large Chinese mills stood at nearly 15 million tonnes as of March 20, both record highs.
"Steel mills are in a more difficult situation as they cannot stop running, but traders can quit if losses are big. The falling order books will not be a good thing for mills," said Huang from the Hangzhou steel trading group. ($1 = 6.2110 Chinese yuan) (Editing by Manolo Serapio Jr., Simon Webb and Joseph Radford)