Baosteel unveils 20pc price rise to offset surging costs

PUBLISHED : Tuesday, 26 February, 2008, 12:00am
UPDATED : Tuesday, 26 February, 2008, 12:00am


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Increases for second quarter boost steelmakers' shares

Shares of Hong Kong-listed mainland steelmakers surged yesterday after Baoshan Iron and Steel (Baosteel) said it would raise second-quarter product prices more than the market expected, boosting confidence that steelmakers could pass on their higher raw-material costs.

The price of benchmark hot-rolled products will rise as much as 800 yuan to 4,842 yuan a tonne, or 20 per cent more than first-quarter levels, the Shanghai steelmaker said.

It joins rivals such as Japan's Nippon Steel Corp and JFE Holdings in raising prices to offset increasing raw material and fuel costs.

Hot-rolled products form about 50 per cent of Baosteel's total output.

Cold-rolled product prices will rise 800 yuan or 17 per cent to 5,596 yuan a tonne.

Baosteel, the mainland's largest steelmaker, will also raise the prices of zinc-galvanised steel sheets, steel plates, full-hard coil, hot-rolled coil, colour sheets and silicon steel.

'The increase is higher than our own and the market's expectations of 500 yuan to 600 yuan because, even if the increase were by 500 yuan, Baosteel's second-quarter product prices would have a 250 yuan premium to the current spot market price,' said Helen Lau, an analyst at Daiwa Institute of Research.

'This spike would boost market sentiment and other steel companies' confidence in further raising their prices to catch up with Baosteel's leading benchmarks,' she said.

Ms Lau said Baosteel needed to raise the price of hot-rolled products by 20 per cent to an average of 4,610 yuan a tonne, up from last year's 3,842 yuan, to cover the rising cost of production.

The firm's parent, Baosteel Group Corp, on Friday agreed to pay Brazil mining giant Vale 65 per cent more for contract iron ore from April. Other costs, such as coking coal and freight, are also soaring.

'The large-scale price rise, indicating just another five percentage points more [for the rest of the year], is necessary to cover the rising costs, which looks a lot easier now,' said Ms Lau.

She expected Baosteel's gross margin this year to remain stable at 16.5 per cent, compared with last year's fourth-quarter margin of 16.3 per cent.

Shares of Baosteel rose as much as 4.1 per cent to 18.35 yuan in Shanghai yesterday, reversing earlier losses, after it announced the price increases. The stock closed at 17.67 yuan, gaining 0.3 per cent and bucking the 3.9 drop in the benchmark CSI 300 Index.

Shares of smaller rival Angang Steel jumped 5.83 per cent to HK$19.98 in Hong Kong, while those of Maanshan Iron and Steel gained 4.5 per cent to close at HK$4.88.

Zhang Feng, an analyst at JPMorgan, expects major steel companies to pass on raw material costs to end-users. He is bullish on steel prices on hopes steel demand on the mainland will grow 15 per cent this year, outpacing a 10 per cent growth in supply.

Steel demand on the mainland increased 46 million tonnes to 434.4 million tonnes last year, according to the China Iron & Steel Association, which says demand may gain a further 40 million tonnes this year.