China steel price hike seen likely after ore deals

By Alfred Cang

SHANGHAI, Feb 19 (Reuters) - China's steel makers will likely be able to use a higher-than-expected rise in iron ore prices as a pretext for hiking their own prices, easing pressure on profit margins in the world's largest steel industry, analysts said.

China's top steel maker, Baoshan Iron and Steel (Baosteel) (600019.SS), is expected to raise second-quarter prices of its key products, including hot-rolled steel used in construction and heavy industry, by about 10 percent from the first quarter.

Baosteel, which has not yet concluded ore price talks with miners, is also likely to raise its product prices further in the following quarters this year, analysts said, partly due to rising freight and fuel costs.

"Strong domestic demand in China will allow steel makers to increase their product prices on the basis of rising production costs, without having to worry about whether high prices would dampen buying interest," said analyst Henry Liu at Macquarie Bank.

Baosteel is expected to announce a rise in key product prices by 300 to 500 yuan a tonne as early as the end of this week. The company's hot-rolled steel coil, commonly considered a market benchmark, was priced at 4,042 yuan a tonne in the first quarter.

That could trigger more increases in Chinese steel prices, which rose 8 percent on average in 2007, as strong domestic demand helps steel mills to secure sales.

China's crude steel consumption in 2008 is expected to grow about 12 percent from last year to nearly 490 million tonnes, Qi Xiangdong, vice secretary-general at the China Iron and Steel Association, told a conference of association members last week.

China's crude steel production will rise by 6 percent to 520 million tonnes in 2008, Qi said, according to a transcript of the meeting obtained by Reuters.

BRISK DEMAND

Growing demand from China's property and manufacturing sectors is fuelling steady expansion and profit growth for the country's steel makers.

"My calculations indicate that gross profit margins at Chinese steel mills rose in 2007 from the previous year for the first time in four years, although raw materials and freight costs jumped visibly," said Macquarie's Liu.

Shares in Chinese steel mills rose strongly after their Japanese and South Korean counterparts agreed early this week to a steep 65 percent rise in iron ore prices with Brazilian miner Vale (VALE5.SA) RIO.N. Chinese firms are expected to complete a similar deal.

Baosteel, which relies entirely on imported iron ore to feed its blast furnaces, has risen 5 percent since the iron ore price hike was reported while Wuhan Iron and Steel (600005.SS), which imports 70 percent of its iron ore, rose 7 percent. Both outperformed a 4 percent rise in Shanghai's benchmark share index .SSEC.

"People are pretty sure that these steel mills will pass on the cost increase to their clients. They will definitely raise prices, as 65 percent surprised everyone inside and outside the steel mills," a Shanghai-based steel trader said.

The 65 percent ore price rise will translate into a rise of more than 20 percent in steel production costs, analysts said.

"Chinese steel mills need to increase prices of hot-rolled and cold-rolled steel by 300 to 350 yuan to cover the rising iron ore cost," said Zhou Tao, analyst at Sinolink Securities.

"If Baosteel raises prices by more than 400 yuan, it can shift all the added costs (to its customers)." (Editing by Edmund Klamann)