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China Baosteel to up prices as overcapacity eases

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SHANGHAI, Feb 22 (Reuters) Top Chinese steel maker Baosteel Group plans to raise prices by about 10 per cent in the second quarter from the first, in a sign that the country's steel prices have finally begun to recover from overcapacity pressures.

The move by Baosteel comes at a time when China's major steel mills are trying to persuade their term iron ore suppliers that tightening margins mean only minimal price hikes are acceptable for the year beginning in April.

Baosteel's quarterly adjustments are seen as an industry benchmark. The parent of stock market heavyweight Baoshan Iron and Steel Co. Ltd. and China's leader in the iron ore negotiations is expected to officially announce prices by Thursday.

''Steel prices at the end of last year were below production costs for most steel mills, and they cannot afford to suffer more losses,'' said a China Iron and Steel Association official.

''But demand for steel products has not changed and there is no reason to support the rise for long.'' Alarmed by poor margins and rising raw materials costs, Beijing is trying to close the nation's smallest steel companies and consolidate the sector. Chinese steel output rose by nearly 25 per cent last year to 349 million tonnes.

The association estimates January crude steel production at about 30.28 million tonnes, down 5.5 per cent from December, but up 20.7 per cent compared with January 2005.

Baosteel will raise hot- and cold-rolled steel prices by 300-500 yuan (-) per tonne, the official Shanghai Securities News said on Wednesday, citing unidentified company sources.

Some low-end products could see prices hiked by as much as 800 yuan, the paper said. Baosteel officials declined to comment.

Other Chinese steelmakers including Wuhan Iron&Steel Co. Ltd.

and Angang New Steel Co. Ltd. have also recently lifted prices.

Overcapacity and low domestic prices have turned China into a net steel exporter in the last few months, undermining prices in the region and threatening market share for steel giants like South Korea's POSCO Co. Ltd. and Japan's Nippon Steel Corp.

IRON WILL Still, rising steel and spot iron ore prices are forcing some in the Chinese steel industry to accept that term ore prices must rise.

''The industry's attitude is changing a bit to understand that term prices should rise as well,'' said an industry source.

He added that a 10 per cent term price rise might be possible, while a 20 per cent rise was unrealistic.

Chinese importers have sped up spot iron ore buys after the Lunar New Year, in anticipation of price gains in April. This has undermined the Chinese industry's negotiating position.

Beijing is trying to claim greater clout in negotiations with suppliers such as BHP Billiton Ltd./Plc., Rio Tinto and CVRD.

Term prices are traditionally fixed by the three suppliers and mills in Japan, the world's largest term iron ore buyer. They rose by 71.5 per cent last year after speculative Chinese buying caused spot iron ore prices to surge.

Baosteel recently concluded a third round of talks in Shanghai with iron ore suppliers without making any progress, state media and industry sources said.

''Signs of recovery of ore and steel products prices have led to different assessments by the two sides and make the negotiations even more difficult,'' a local newspaper said.

REUTERS SD PM1609

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