Angang Steel Company Limited

Mainland steel shares rally on expectation mills will raise prices

PUBLISHED : Wednesday, 20 February, 2008, 12:00am
UPDATED : Wednesday, 20 February, 2008, 12:00am

Shares of mainland steel companies shot higher yesterday as investors got a better picture of the industry's possible fortunes this year while speculating that mainland mills will follow their Japanese counterparts to pass on higher raw material costs.

Japan's Nippon Steel Corp and South Korea's Posco on Monday agreed to a 65 per cent jump in iron ore prices for supplies from Brazilian mining company Vale in the industry's first deal for the year.

Mainland companies are expected to sign at the same price. The mainland is the world's biggest iron ore importer with about 24 per cent of its supplies coming from Brazil.

'There's no more uncertainty to keep the market nervous,' said Zhang Xi, an analyst at UOB Kay Hian. 'It's still not as bad as in 2005, when prices jumped 71.5 per cent.'

Shares of Baoshan Iron and Steel, the listed arm of the nation's largest steelmaker Baosteel Group Corp, rose 3.49 per cent to 18.10 yuan and Wuhan Iron and Steel gained 3.57 per cent to 22.07 yuan in Shanghai.

In Hong Kong, Angang Steel's H shares climbed 6.16 per cent to HK$18.62, Maanshan Iron and Steel rose 3.09 per cent to HK$4.66, while Chalco ended 1.57 per cent higher at HK$14.22.

The sector got a further boost when Tokyo Steel Manufacturing, Japan's biggest maker of steel girders, yesterday said it would raise product prices as much as 13 per cent next month, giving investors hope that mainland mills will follow suit.

Asian steelmakers, including those on the mainland, were likely to offset the higher costs through price rises, UBS said in a report yesterday.

Earlier this month the European brokerage revised upward its iron ore price estimate to 55 per cent, still below the 65 per cent deal struck with the Brazilian miner Vale.

For January to March, Angang Steel had adjusted its average product price upwards, noted UBS analyst Hubert Tang. The price for the benchmark hot-rolled steel coils for next month is 4,000 yuan per tonne, up 14 per cent from the end of last year. Mr Tang also expects Baosteel to raise its second-quarter price by 5 per cent to 10 per cent.

Market sources noted yesterday that although mainland mills would have to pay more for their iron ore, along with high costs for coking coal to process it, they still were enjoying strong domestic steel demand.

Continued infrastructure work - particularly after this winter's damaging storms - will help boost domestic steel demand 11 per cent this year, after consumption rose almost 12 per cent last year, according to a China Iron and Steel Association report.

Production is expected to rise only 6.3 per cent, forcing a 27 per cent drop in exports. The country consumes most of the steel it makes.