China’s steel prices spike on record raw material costs, raising inflation fears

Nearly 100 Chinese steelmakers adjusted their prices upwards on Monday amid record costs for raw materials like iron ore
Although the effect on overall inflation is not yet clear, the spike in steel prices could threaten a range of downstream industries

China economy

Frank Tangin Beijing

Published: 10:00pm, 10 May 2021

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The decision by Chinese steel mills to fire up prices amid soaring raw material costs has raised concern about inflation risks in the world’s second largest economy and the impact this may have on smaller manufacturers who cannot pass on higher costs.

Commodity prices are above pre-pandemic levels in China, with the cost of iron ore, one of the main ingredients used to make steel, hitting a record high of US$200 per tonne last week.

That prompted nearly 100 steelmakers, including leading producers such as Hebei Iron & Steel Group and Shandong Iron & Steel Group, to adjust their prices on Monday, according to information posted on industry website Mysteel.

Baosteel, the listed unit of China’s largest steelmaker Baowu Steel Group, said it would raise its June delivery product by up to 1,000 yuan (US$155), or more than 10 per cent.

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Steel prices have been climbing since February. Prices rose 6.3 per cent in April after gains of 6.9 per cent in March and 7.6 per cent the previous month, according to the South China Morning Post’s calculations based on China’s domestic steel price index, which is published by the Steel Home consultancy.

As of last Friday, steel prices were up 29 per cent for the year to date.

Although the effect on overall inflation is not yet clear, the spike in prices could threaten a range of downstream industries, as steel is a key material used in construction, home appliances, cars and machinery.

A survey of the China Iron & Steel Association, a semi-official industry body representing most producers, found that reinforcing bar used in construction soared 10 per cent to 5,494 yuan per tonne last week, while cold-rolled sheet steel, mainly used for cars and home appliances, rose 4.6 per cent to 6,418 yuan per tonne.

Both consumer and producer price data is due for release on Tuesday. Consumer price gains are expected to accelerate to 1 per cent in April from a year earlier, up from 0.4 per cent in March, according to a Bloomberg survey of economists. The producer price index, which reflects the prices that factories charge wholesalers for their products, is forecast to rise to 6.5 per cent in April year on year, from 4.4 per cent a month earlier.

The high price for iron ore in China comes amid a trade dispute with its biggest supplier, Australia. Last week, China’s top economic planning agency suspended high-level economic dialogue between the two nations.

China’s reliance on Australia has worried some steelmakers, but analysts from Zhongtai Securities said the suspension would not have much of an impact on steel, despite market fears of supply disruptions.

The brokerage attributed the steel price hikes more to government efforts to scale back capacity.

China-Australia tensions ratchet up unease in Beijing about surging iron ore prices

But analysts Guo Hao and Cao Yun warned China should not reduce its iron ore imports from Australia because it will “drive up prices significantly”.

“Other long-term measures may be used, such as accelerating mining in other countries, to reduce its reliance,” they said in a note.

Worries over imported inflation have been raised at the highest level of China’s government, including in an early April meeting of the Financial Stability and Development Commission headed by vice-premier Liu He. Authorities vowed to “maintain basic stability of prices” and “pay special attention” to the trends in commodities prices.

This article appeared in the South China Morning Post print edition as: Inflation fears as mainland steel mills raise prices