China: Steel prices rise unlikely sustained; not enough to offset cost rise”-Goldman Sachs”””

According to recent by Goldman Sachs Cost-push steel price rise not sustainable SHFE May rebar price hit an intraday high of RMB4,866/t today (near the historical high of RMB4,881/t in mid-Apr 2010) on the back of Baosteel / Wugang steel prices hike for Feb. We believe the recent rise of steel prices is largely driven by steel mills’ intention to pass through the rising input cost and futures investors’ anticipation of more upside on cost push.

Without any material improvement in China steel sector’s supply/demand fundamentals, we believe the steel price rise is unlikely to be sustained.

Further demand slowdown

Recent channel checks with steel/iron ore traders this week show that, steel traders are getting more calls from banks requesting

repayments. But, traders found it difficult to sell at the current price level. Steel mills also told us that downstream demand growth is not encouraging and that export has been dormant for months and order book from export still weak. As the harsh winter and Chinese New Year holiday approaching, we expect even slower demand growth in the near term.

Exacerbating overcapacity

China daily crude steel production increased 8% from early Nov (1.60 mt/day) to late Dec 2010 (1.73 mt/day). As most Chinese steel mills source coking coal domestically and many have inventory sufficient to support production for 1-2 months, the supply interruption in Australia is unlikely to ease China’s surging steel production. We expect China steel output to rise further in Jan.

Steel inventory rising fast Rebar/wire rods inventory jumped 10%/27% mom in the week of 2 Jan. This, combined with slow demand and growing supply, convinced us that this round of cost-push steel price hike is not sustainable. We expect current steel spot prices to fall when the traders are forced (by their lenders) to liquidate inventory (or collateralized steel). Steel price hike not sufficient to offset rising cost Even though we expect Angang to follow Baogang/Wugang and raise its Feb steel prices soon, and even after the Feb price hike, Chinese steel mills are unlikely to fully pass through the increasing input cost.