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The dwindling material costs and government's economic stimulus package might not work wonders for the nation's flagging steel industry as the demand for the metal has shrunk considerably due to the economic downturn, analysts said.

"Steel and iron consumption will keep slowing down for the next three to six months at least," said Becky Yuen, a research analyst at Daoheng Securities. "Even companies that need steel products would make the best of their stockpile and will not be in a hurry to purchase."

China, the world's biggest steel producer and consumer, will see its steel production flat in 2009 or risk falling further, Citigroup said in a research report. The volume of Chinese steel exports in 2009 is expected to plummet substantially, given the global recession, Jing Ulrich, managing director of China equities at JPMorgan, wrote in an e-mail to China Daily.

Although cash prices of iron ore imported by China have tumbled 62 percent since May and coal prices have slid substantially over the last few months, steel makers couldn't translate the lower production costs into higher profit margin, according to Beijing Antaike Information Development.

Domestic steel prices have slumped more than 35 percent from their peak in June and most steel mills were operating at a loss.

"Spot iron ore prices have fallen below contract iron ore prices, which indicates how warm the market becomes," Yuen said.

Beijing's 4-trillion-yuan economic stimulus package will boost steel demand for housing, railways and roads over the next two years, but steel firms producing appliances, machinery and automobiles will still face weaker demand, analysts say. China Daily

However, the current situation will benefit mini-mills and smaller producers that rely on spot material over their bigger counterparts with big exposure to higher contract prices.

China imports most of its iron ore from Australia and South America. The country's raw material purchase fell 22 percent in October to 30.6 million tons from the previous month, according to the Customs General Administration.

Moreover, Beijing's 4-trillion-yuan economic stimulus package should boost steel demand for housing, railways and roads over the next two years, which might make up for part of the slump.

The stimulus package may boost China's iron ore imports to between 400 million and 450 million tons, said Helen Lau, an analyst at Daiwa Securities Group.

Nevertheless, market appetite would only go to construction-related steel products. "Those for producing appliances, machinery and automobiles would still face weaker demand," Daoheng's Yuen said.

She also noted Angang Steel is the hardest hit among the country's steel producers, as it faces the biggest cost pressure.

The company sources iron ore from its parent group based on the average price of the prior six months, "which makes its material costs much higher than other steel mills."

Daoheng Securities puts the "overweight" tag on Chongqing Iron & Steel due to its location in Sichuan province; it will be the major beneficiary as more efforts will be given to speed up the reconstruction works following the May 12 earthquake.

(HK Edition 11/27/2008 page3)