Suppliers wary of cutting prices even as steel costs fall

Although they are now spending less on the metal, several factors are preventing China suppliers from decreasing product quotes.

Prices of steel products will, at best, remain stable as rising labor outlay and the appreciating yuan negate recent reductions in material costs. Some suppliers even plan to augment quotes.

The last is true in the stainless steel cookware segment, where the $31 decrease in the per-ton cost of the material in 2Q 2011 hardly made a dent in total expenditure. Stainless steel accounts for more than 60 percent of aggregate outlay and costs should go down at least 5 percent for suppliers to consider cutting prices.

As of early-September, a ton of 4mm stainless steel plates was $3,328, slightly lower than May rates. At that time, the material topped $3,390.

Further, the strong yuan is eating into cookware margins, which currently stand between 5 and 8 percent. The additional pressure has practically ensured the upswing in prices.

At a minimum, Yaward Industrial Development Ltd expects quotes to increase 5 percent in the months ahead.

Prices for other household products, including travel and coffee mugs, and water bottles, will be generally unchanged.

Quotes for carbon and stainless steel valves are also likely to stay at current levels to sustain margins of 5 to 10 percent amid high labor costs.

Moreover, short-term decreases in steel rates such as those seen in past months have minimal impact on the valves sector, according to a spokesman for Xiamen Landee Industries Co. Ltd. As with other manufacturing industries, valve suppliers stock up on materials, preventing them from reflecting immediately cost reductions on final prices.

Costs fell in May after rising continuously for nine months when Shanghai Baosteel, Angang and Wuhan Iron, the major steel manufacturers in China, lowered ex-factory prices.

Concerns over margins, however, have put a stop to the reductions.

“Steel costs peaked in the early months of 2011 and the cuts implemented were only natural,” said Wang Zheng, analyst of Dahua Futures Co. Ltd.

In fact, rates have fluctuated in the months following the decrease in May. At that time, 5.5mm hot-rolled coil was about $718.50 per ton. In mid-September, the material cost $740 then fell to $710 a week after.

Over the past four months, cold-rolled coil has crept up 4 percent and is now $867.

Wang and Hou Zhiyun of Beijing Lange Steel Information Research Center said large material providers will offer fixed steel rates before winter while SMEs will be more flexible.

Hou said oversupply is a primary factor behind falling costs.

Domestically, construction projects implemented in line with the four-year steel industry stimulating plan are nearing completion, minimizing requirement.

The off-peak period across various manufacturing and building industries is slowing demand for steel further.

SMEs, most of which are based in Hebei province, are likely to reduce steel output. This comes as the central bank of China raised the deposit reserve ratio for the sixth time, reducing the available cash flow for SMEs.