February 26, 2009 / 3:36 AM / 11 years ago

Asia Steel-China spot prices fall again on inventory build-up

* China prices down 5.3 pct

* Rising steel inventory and weak demand

* China raises output for second consecutive month

By Miyoung Kim

SEOUL, Feb 26 (Reuters) - Chinese spot steel prices fell 5.3 percent in a third consecutive weekly fall, on rising inventory after a much-anticipated demand recovery failed to materialise.

Prices of China’s benchmark hot-rolled coil fell to around 3,527 yuan ($515.9) a tonne this week, from 3,665/3,785 quoted last week, data from Metal Bulletin showed.

“Many mills are offering discounts to their list prices to reduce inventory as demand from end-customers is quite weak,” said a trader.

China, the only major market that has seen spot steel prices rising in recent months, spurred by the government’s nearly $600 billion spending plan, joined other markets this month as demand continues to remain weak.

“Downstream orders have recently improved compared with the last quarter, but they have still fallen markedly from a year earlier,” Baosteel (600019.SS) told Reuters on Wednesday. [ID:nSHA58038]

The reversal in prices, triggered to a large extent by increased output in the absence of a strong demand recovery, may continue for the coming months as output continues to rise.

China, the world’s biggest steel producer and consumer, raised production for a second consecutive month in January from the previous month, encouraged by the government spending plan, and some indicators suggest the trend may continue at least until March.

Brazilian miner Vale VALE5.SA (RIO.N), the world’s biggest iron ore producer, said late last week it expected to ship a record 30 million tonnes of ore to China in the first quarter. [ID:nN20281223]

“Demand (for iron ore) in China is coming back beyond previous levels...China is helping cover a lot of weakness in other markets,” said Vale’s director of ferrous minerals, Jose Carlos Martins.

China raised steel output by 10 percent in January from the previous month on top of a 7 percent gain in December, expecting a surge in demand in a post-Chinese New Year holiday in February, which failed to appear.

“Over the Chinese New Year trader steel inventory increased from below average to 25 percent above average. This has left inventories up 17 percent for the course of February versus the prior year,” Citigroup analysts said on Tuesday.

Macquarie analysts also said in a note that steel inventory at Shanghai’s warehouses surged after the new year holiday in late January.

China’s increasing production and massive overcapacity is also a big threat to any global price recovery as the country ships almost a quarter of its output overseas, where demand remains poor and deep supply cutbacks are extended.

China had 660 million tonnes of capacity versus actual production of around 500 million tonnes in 2008.

Export prices of benchmark hot coil from China free on board also tumbled 12 percent to $505 a tonne as major buyers struggle with high inventory, weak demand and extended output cutbacks.

Japan’s steel imports dropped for the third straight month, falling 31.5 precent in January from a year ago, as automakers reduced output and reported a 28-percent drop in sales last month. [ID:nT50325]

Steel production from South Korea tumbled 26 percent in January from a year ago and Japan saw a 38 percent drop to 6.4 million tonnes, the lowest level in 40 years. (Reporting by Miyoung Kim; Editing by Michael Urquhart)

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