Cost of steelmaking in China getting higher

While economy develops with high speed and more capital is invested on every walk of life, China starts to show its hunger for energy and worry of over heated investment. Of course, steel industry is one of key factors that made such intension situation. As a result, like other industries in China, steel industry has to suffer higher productive costs partly caused by itself. Beside price hikes of iron ore and non-ferric metals, now, under the pressure of the market and the control by government, other costs have been increased and tend to keep increasing in the future. These costs are, Firstly, oil. The price increase in oil brought remarkably negative influences to the world's economy. But, oil price within China is determined by the government rather than the international oil market, therefore the impact was not as serious as what people had thought because government tended to sooth the negative influences by financial subsidy. Even so, price hike of oil is also inevitable. On March 24, China government announced to increase price of gasoline and diesel oil by RMB 300/ton and RMB 200/ton respectively. Two months later, same prices both increased by RMB 500/ton again. Secondly, logistics. Total logistic costs of steel industry consist of sea transport, railway, inland waterway, and truck transportation. Prices of all the above began to increase in 2006. In addition to the oil price factor, other major reasons can also account for this. Regarding sea transport, the direct reason is that many Chinese mills and ore traders made big orders and imported iron ore by seaway this year. Railway is the most important and cheapest transportation mode in China. Due to its limit, currently, only 30%-40% demand for railway can be met. Under the pressure of the market, China government decided to adjust cargo transportation price by railway from RMB 0.0861/ton•km to RMB 0.0905/ton•km. This price adjustment has been effected from April 10. Thirdly, electric power. China is a country that seriously needs electric power. Due to scarcity of electric power, many factories in China have to stop work at times in summer so as to guarantee people's demand for life. After lots of argument participated by all parties involved, China government announced to increase price of electric power from June 30. Average price increased by RMB 0.02494/kw•h. Lastly, capital. To control the over heated investment, especially investment on fixed assets, government has taken many measures. Increasing the cost of capital is of high effectiveness among these measures. On April 28, China central bank announced to raise the RMB benchmark lending rates of the financial institutions. The benchmark interest rate of loans with a maturity of one-year of the financial institutions was raised by 0.27 percentage points from 5.58% to 5.85%, and interest rates of loans with other maturities were adjusted accordingly. Such similar adjustment is expected to be redone in future. Currently, local and overseas steel market is booming. Chinese steelmakers can compensate their additional costs by steel profits. But with upcoming changes of market, how to decline or transfer costs might become a problem steelmakers will have to face in future.