Baosteel price cut may cause market to soften further

Baosteel price cut may cause market to soften further

Seeing its inventories accumulate due to cheaper alternatives in the domestic market, Baosteel was forced to concede yesterday that the market conditions in China could no longer support the company's price levels. China's largest steel maker responded to the soft domestic market by slashing prices for the first time in more than a year. The move is not necessarily surprising given that Baosteel's rivals had been reducing their prices on a monthly basis since May; Baosteel could only play the role of market regulator for so long. The decrease in hot rolled coil prices of the company reached 17 percent, which could be accepted as normal in terms coming into line with the market average. However, the decrease in specialty steel product prices is a bit surprising. Specialty steel products are the most important competitive strength of the company in the current market situation. The company owns the largest high-end steel production lines and, despite the over-supply situation in the domestic market in terms of commercial grade hot and cold rolled sheet or medium plate, the country lacks enough domestic produced specialty steel to satiate demand. Baosteel's price decrease in electrical steel, by 15.4 percent to RMB 6'441/ton ($795/ton), indicates that the company possesses high electrical steel inventories. These inventories piled up due to cheaper import prices and cheaper prices from competitor Wuhan Steel. The only specialty steel product that did not see a price reduction is tinplate. Not only will the steel giant's price cuts cause ripples throughout China's domestic market, but it will likely have a noticeable impact on international markets in the fourth quarter. Despite the lowered or eliminated tax rebates, China's steel industry will surely place more emphasis on exports during the fourth quarter due to the current domestic situation.