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Steel prices see further decline in July

By Chen Dujuan (Global Times)

08:15, August 17, 2012

Steel prices further declined in July and will continue to fluctuate at a low level, due to weakening demand and excessive supply, an industrial association said Thursday.

The China Iron and Steel Association (CISA) said that by the end of July its steel price index was at 108.08 points, 7.4 points lower than in June and 26.56 points lower year-on-year. Steel prices also fell more steeply in July than in June.

Overcapacity still burdens the sector, with demand growth also slowing due to the sluggish economy and reduced exports, the association said.

By the end of July, steel prices had dropped for five consecutive months in North America and three months in Europe and Asia, along with a noticeable reduction in steel exports.

However, China's daily steel production remains at a high level at 1.99 million tons in July, up 4 percent year-on-year and only slightly below the record high of 2.02 million tons in April.

The steel sector needs huge initial investment, so companies are reluctant to cut production as it will affect their revenue, Jia Liangqun, vice president of Shanghai Ganglian E-commerce Co, told the Global Times Thursday.

Also, it is hard for steel mills to cut production capacity for a short period, because some equipment such as blast furnaces will suffer a greater degree of wear and tear if it doesn't operate at full capacity, said Qu Xiuli, deputy secretary-general of the CISA. Furthermore, local governments need to maintain their GDP growth, Qu noted.

Steel mills that have mining resources, advanced technology and good management systems can still earn profits, said Qu.

Some steel mills have reduced or suspended part of their production. CISA's 74 members, who account for 80 percent of China's steel output, cut their production by 0.1 percent year-on-year in the first half of the year.

But small-scale enterprises expanded production in the first half by 12.9 percent on average.

Total profits in the sector slumped by 95.81 percent in the first half of 2012, compared with last year, and the profit margin in the industry was only 0.13 percent on average.

Steel mills also need policy support, said Qu. The association is appealing for a resumption of the policy encouraging export processing enterprises to use domestically produced steel by offering them a 17 percent tax refund. The policy began in 1998 but was canceled in 2005.

However, Jia said the policy could not solve the fundamental problems facing the sector. "It is still up to the market competition to eliminate firms that are running out of money, but it will take a long time to reach a balance between demand and supply."

As a result of slowing growth in the steel industry, the demand for iron ore is also falling along with prices, said Jia.

From January to July, the average price of iron ore imports fell by 14.93 percent year-on-year to $138.5 per ton, and further dropped to $121.61 per ton in the second week of August, the lowest since last October.

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