Baosteel opts for markups in weak market

Supported by sufficient demand from downstream industries, the nation's leading steelmaker Baoshan Iron and Steel Co Ltd (Baosteel) has raised the ex-factory prices for its February mainstay products by between 50 yuan ($8.27) to 150 yuan per ton.

This is the second month in a row the Shanghai-based steel mill has lifted prices. Before the two-month streak of gains, Baosteel had kept the prices of major products unchanged for three consecutive months.

Analysts said Baosteel adjusted up its prices as a result of sufficient new orders from downstream industries, such as car-sheet demand from the auto industry.

In 2013, the auto industry outperformed other fields and maintained a stable demand for steel products used in car-making, which supported the price rise, said Yang Hua, a research manager with My-steel.com, a steel market information provider.

More than 20 million automobiles were produced and sold throughout 2013, a new record for both global and Chinese markets, according to the latest data from the China Association of Automobile Manufacturers.

"Baosteel's direct sales model is another factor in securing the steelmakers profit," said Wang Guoqing, deputy director of the Lange Steel Information Research Center.

According to Wang, between 70 and 80 percent of the mill's orders came directly from its downstream industries' clients, helping the company to maximize its profit margin by avoiding extra sales costs.

Baosteel has an efficient tailor-made supply service and high product quality, unparalleled across the nation's steel makers, added Wang.

Since its first processing and delivery center was set up in the late 1990s, there have been more than 30 similar centers in operation across the nation.

With such services, downstream companies such as automobile firms, home electric appliance makers and shipbuilders can place special demands for steel products.

Apart from its own product strengths, rising costs of the raw materials are also blamed for the latest price hike.

Analysts said domestic steel companies are still struggling to strike a balance, but as many as 40 percent of them are expected to report losses in 2013.

Unlike Baosteel, Jiangsu Zhangjiagang-based Shagang Group lowered its ex-factory prices of steel products for February delivery for the third month in a row.

"More than 50 percent of Shagang's products are construction steel, which means its demand is easily affected by the macroeconomy and demand circle," said Wang.

Although the nation's 86 major steelmakers' average sales margin is expected to be higher than the 0.04 percent of 2012, analysts said most of them will still operate on low profit margins because downstream demand is constantly declining year-on-year.

The sales margins of the nation's major steelmakers averaged 0.48 percent in the first 10 months of 2013, according to the latest data from the China Iron and Steel Association. While the sales margin of steel companies was less than 1 percent in 2012, that figure had been above 2 percent and was as high as 8 percent in 2004.

"The only chance for a better profit outlook is a price drop in iron ore," added Yang.