Have steel prices bottomed?

Steel prices in China have reversed a sequence of decline that lasted for more than 3 months since April, according to data reported by China Iron and Steel Association (CISA).

As China is the world largest producer of steel, producing half of the global steel output, steel prices of China have significant impacts on global steel prices. In the first quarter of 2010, over-production in China created downward pressure on steel prices worldwide as steelmakers such as those in the US face fierce competition from low-priced imports from China.

However, analysts cautioned that it is too early to call for a turnaround in the sector. In Marketwatch,

"We believe that the signs of a tentative recovery are welcome for a beleaguered sector," said Goldman Sachs analysts in a report this week.

"However, we caution that channel checks with steel traders themselves suggest that it is too early to tell if the current recovery is sustainable," said analysts Rajeev Das, Nana Hasegawa and HJ Moon.

......................."Many traders do not believe the recovery to be real," they said, because the price rises for flat steel "represent the raising of asking prices, as few actual transactions appear to have taken place."

Moreover, they said, traders have indicated that "barring the auto sector, demand from many other industries remains weak" amid a seasonal slowdown in many Asian markets, particularly South Korea.

While activity in China "still appears to be quite strong, some traders are afraid that the government tightening could yet have a delayed impact when construction in progress is finished," they said. But they cited consensus among traders that production cuts in July were deeper than those in June, and economic data due out in the middle of this month "will help soothe concerns."

Despite this caution, investors took advantage of this short-term rally of steel prices. Steel stocks such as AKS, X, NUE had large gains since mid-July after months of downtrend. Steel ETF, SLX, rallied 12% since mid-July versus 3% of the major index, S&P 500.