* Some steelmakers starting plant maintenance
* But output cuts too small to support prices
* Weak steel prices pile pressure on iron ore
By Ruby Lian and Fayen Wong
SHANGHAI, June 7 Some Chinese steelmakers are
tentatively curbing output by starting plant maintenance, as
weak steel prices squeeze margins, but the cuts look like being
too little and too late to support prices at the lowest in more
than nine months.
With a glut in supply persisting, an extended period of weak
steel prices in the world's largest consumer and producer is
likely to put more pressure on iron ore. Prices for the key
steelmaking ingredient .IO62-CNI=SI have fallen a third this
year and are set to dip further as more ore comes onstream.
Steel mills, which ramped up production earlier in the year
on hopes for strong demand, are reluctant to make decisive cuts
even as China's economic growth falters, fearful they could lose
market share and that banks could pull back credit.
"Steel production is starting to slow and this will extend
to July. But the maintenance programmes will not offer much
support for prices," said Hu Yanping, an analyst with industry
consultancy Custeel.com, adding that mills will be forced to
reduce prices further in July.
Baoshan Iron & Steel, the biggest listed
steelmaker by market value, known as Baosteel, slashed prices
for the first time in nine months in June and is expected to cut
again in July, slicing steelmakers' razor-thin margins further.
Some major mills such as Hebei Iron & Steel Group have
scheduled partial maintenance for June, while large private mill
Rizhao Steel has already started repair work, Custeel said.
The consultancy estimates that production cuts at steel
mills it surveyed will reduce crude steel output by 1.24 million
tonnes over the whole maintenance period and hot-rolled coil by
But that is a drop in the ocean compared to bulging
stockpiles, with China Iron & Steel Association data showing
steel product inventory at large mills at about 13.7 million
tonnes. Inventories held by traders are hovering at about 20
million tonnes, according to consultancy Mysteel.
Custeel's Hu reckons China's steel prices can only rebound
if average daily crude output drops to around 2 million tonnes,
down roughly 8 percent from current record levels.
But mills are reluctant to make such drastic reductions
despite currently losing 100-300 yuan ($16-49) for every tonne
they sell. They say that hefty fixed costs would make it
expensive to halt production lines and that cuts would erode
their economies of scale, reducing their market share.
Industry sources said that producers also fear output curbs
could prompt banks to cut back on loans, a crucial lifeline for
a sector in which the 30 largest listed firms have racked up
combined debts of nearly 760 billion yuan ($124 billion).
"Banks will pull back lending or stop rolling out loans once
mills stop producing, so mills are all desperate to keep up with
production and maintain cash flow," said an official with a
medium-sized mill in south China, who declined to be named.
China's annual crude steel capacity has expanded to nearly 1
billion tonnes, with a surplus of nearly 300 million tonnes,
even though profit margins slid to 0.04 percent last year from
3.3 percent in 2008 and 2.24 percent in 2011.
Local governments are keen to help mills survive as the
sector employs a large number of people and is an important
source of tax revenue.
Authorities in the northeastern city of Beipiao last week
provided a subsidy of 31.8 million yuan to Linggang Beipiao
Steel Pipe, a unit of Lingyuan Steel.
But local governments are struggling with heavy debts
themselves, so are unlikely to offer much long-term support.
"Local governments are able to keep steel mills going but in
the long term, some (producers) may have to go bankrupt," said
Sheng Zhicheng, vice secretary general of the steel logistics
committee under the China Federation of Logistics & Purchasing.
($1 = 6.1317 Chinese yuan)
(Editing by Joseph Radford)