Nippon Steel expects China steel prices to hold firm this year

16 February 2017

Nippon Steel & Sumitomo Metal, Japan's biggest steelmaker, expects steel prices in top consumer China to hold firm at least until its Communist Party congress late this year, amid solid demand that is underpinning coking coal and iron ore markets.

Chinese futures contracts for steel reinforcing bars SRBcv1 used in construction have already risen 17 percent in 2017, on top of a gain of more than 60 percent last year. Besides sustained demand for construction activity, Beijing is forcing steel producers to cut output as it wages its war on smog, raising worries about supply.

"Steel demand and prices in China have been fairly strong on the government's stimulus," Nippon Steel (5401.T) executive vice president Toshiharu Sakae told Reuters in an interview.

"I expect this trend to continue for a year as Beijing will work hard to support its economy ahead of the Congress," Sakae said, referring to China's 19th Communist Party Congress that is expected to be held late in the second half of 2017.

To pass on the resulting higher materials costs, Nippon Steel - the world's third-largest steelmaker by output in 2015 - wants to raise product prices in the financial year starting in April.

"My guess is that coking coal prices will stay at $150-200 a tonne as China is said to be trying to cut market volatility," he said, adding that iron ore prices may move towards $90 a tonne on a free-on-board basis on hopes that China's imports grow.

China's iron ore futures hit their highest in more than three years this week, amid solid steel demand.

To offset rising costs, Nippon Steel has sought to increase product prices by around 20,000 yen (140 pounds) per tonne this financial year, but will need more hikes next year, Sakae said.

The high materials costs have squeezed margins and it is difficult to make the capital expenditure needed to maintain high quality and the swift delivery of products, he said.

The company's iron ore term contracts for April-June quarter are expected to come at around $77-78 a tonne, up from $57 this quarter, Sakae said.

Raising its product prices would help improve its performance in the upcoming 2017/18 financial year. The company has predicted its recurring profit will likely fall 35 percent in the year to March 31 due to materials price gains that have outpaced the steel price increases.

Sakae, who has warned that worries over U.S. President Donald Trump's protectionist policies are "growing every day", said the recent friendly meeting between Trump and Japanese Prime Minister Shinzo Abe has not eased his concerns.

"If the U.S. takes measures that affect the Japanese auto industry, it will indirectly hurt our business," he said.