China's steel industry, the largest in the world, will benefit from a stronger renminbi, according to industry officials and analysts. However, the industry is now bidding farewell to its low-cost era.

The renminbi's recent 2 per cent appreciation will cut the costs of imported materials by 3 billion yuan (US$369.9 million) this year, in particular iron ore, according to Qi Xiangdong, deputy secretary-general of China Iron and Steel Association.

According to the current iron ore CIF (cost, insurance and freight) prices, Qi said, the steel sector is expected to save up to 2.5 billion yuan (US$308.3 million) this year due to the stronger renminbi.

China's iron ore imports will total 240 million tons this year, he said.

From January to June, the nation imported 131 million tons of iron ore, up 33.4 per cent from last year.

The renminbi's appreciation could also lower costs of the sector's steel scraps and coking coal imports by some 500 million yuan (US$61.7 million) this year, Qi said.

China's steel scraps and coking coal imports will total 10 million tons this year.

Zhou Xizeng, an analyst with CITIC Securities Co Ltd, told China Daily that the steel sector will gain an extra 4 per cent growth in profits this year as a result of the stronger renminbi.

"The renminbi's appreciation will have a positive impact on our steel sector in general, as China's imports of steel products and related materials remain much larger than exports," Zhou said.

China imported US$35.7 billion of steel products and related materials last year, compared with US$13.3 billion of exports, according to Zhou.

However, Luo Bingsheng, vice-chairman of the steel association, indicated that despite the stronger renminbi, the steel sector has already "said good-bye" to a low-cost era, due to mounting cost of materials.

The average cost of steel production in China will rise by around 15 per cent per ton this year compared with, Luo said.

"This situation indicates that China is accelerating its pace in turning into a strong steel producing nation from merely being a big one," said Luo.

He predicted China's total steel output will reach 330 million tons this year, up from 273 million tons last year.

The nation's steel output grew by 28.3 per cent to 164.9 million tons in the first half of this year compared with the same period last year.

The steel sector's profit margins are shrinking due to rising material costs and sagging steel prices, Luo added.

Profits of China's top 68 steel makers grew by 27.2 per cent year-on-year to 49.2 billion yuan (US$6.1 billion) in the first half of this year, according to statistics from the steel association.

However, the profit growth was down 37.6 per cent on the growth in 2004.

Earlier this year, BHP Billiton, Rio Tinto and Companhia Vale do Rio Doce, who control more than 75 per cent of global iron production and trade, increased their iron ore prices by 71.5 per cent for 2005.

Currently, the average CIF price of iron ore in China stands at US$60 a ton.

The average steel price in China tumbled by 10.5 per cent at the end of June from the end of March this year due to an oversupply in the domestic steel market, statistics showed.

Qi said domestic steel prices will not fluctuate dramatically from their current levels in the second half of this year.

CITIC's Zhou said China's dipping steel imports are unlikely to rebound strongly in the second half of this year because international steel prices remain much higher than those in the domestic market, despite the renminbi's appreciation.

On average, by the end of June, international steel prices were 9.5 per cent higher than domestic prices.

China's imports of steel products declined by 26.8 per cent year-on-year to 11.6 million tons in the first half of this year, statistics showed.

Luo said that China will import 24 million to 25 million tons of steel products this year, down from 29.3 million tons in 2004.

(China Daily 08/02/2005 page9)