July 7, 2015 / 9:25 AM / 5 years ago

China steel prices lowest in over 20 years, squeezing small mills

SHANGHAI, July 7 (Reuters) - Chinese steel prices are at their lowest in more than 20 years as demand in the world’s top producer wanes, industry data shows, and some analysts say the free-fall is not even close to an end, threatening the survival of small steelmakers.

A composite price index of eight steel products compiled by the China Iron & Steel Association (CISA) fell to 65.28 points last Friday. The index is based on 1994 reference prices, meaning that prices are now nearly 35 percent lower than they were 21 years ago.

While the association did not begin compiling regular data until 2001, current prices are already believed to be lower than 1999, when the industry was hit by the Asian financial crisis.

Last year, when the index fell to 95, CISA secretary general Liu Zhenjiang said it was already at its lowest ever.

The stuttering Chinese economy is hitting demand for a range of commodities including iron ore, steel and copper.

“The biggest problem is poor demand. The worst winter is yet to come and some small steel mills have already shut down, which could become permanent as cash flow will remain a big issue,” said an official at a state-owned steel mill.

The price slide has meant local steel mills have failed to benefit from the rapid decline in iron ore, which remains about a third higher than two decades ago, and the sector is also struggling with surging environmental compliance costs.

China’s appetite for steel is expected to take a further hit as construction eases over the summer, forcing mills to cut production. January-May output fell nearly 2 percent from a year before, with consumption dropping 5 percent, CISA data showed.

The most traded October rebar futures on the Shanghai Futures Exchange hit 1,948 yuan a tonne - the lowest since the contract’s launch in 2009 after losing 27 percent this year.

Spot rebar in Shanghai has tumbled to 1,930 yuan, 60 percent lower the 4,890 yuan peak in August 2011, Mysteel data showed.

China’s recent stock market turmoil is now threatening to pull the entire commodity complex into the red.

The majority of Chinese steel mills are still reluctant to cut production in order to maintain cash flow and bank credit.

“This is the end game for mills. Whoever survives the current crisis could survive permanently, while those who can’t will exit the market for good,” said Cheng Xubao, an analyst at industry consultancy Custeel.com based in Beijing. (Reporting by Ruby Lian and David Stanway; Editing by Ed Davies)

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