4 Min Read
* Rising metal inventory reflects growing supplies
* Mills making 800 yuan profit for every one they produce
* Execs worry market on verge of sharp drop
BEIJING, March 10 (Reuters) - China's steel mills are churning out as much metal as possible, enjoying their best profits in years, even as they worry the months-long rally in prices in the world's top steelmaking market is running out of steam, executives said.
The strategy to pump out more may threaten the bull market, during which prices for steel rebar used in construction have skyrocketed to their highest since 2014 in recent weeks.
As metal piles up in the country's major cities, executives say the price surge has mainly been fuelled by another bout of speculative buying rather than underpinned by a pick up in industrial demand.
Speculators have splurged on futures for iron ore and steel, betting on higher prices after Beijing has pledged billions of dollars in construction and infrastructure projects as part of its stimulus programme.
But Zhang Wuzong, president of Shiheng Special Steel Group in Shandong province, reckons the market is on the verge of dropping sharply.
"I think the current rally in steel price is a mentality issue and it cannot last," he said on the sidelines of the annual meeting this week of China's parliament, the National People's Congress.
Last year, the majority of steel companies were bleeding cash, said Zhang.
Steel mills are currently making a profit of up to 800 yuan ($115.74) a tonne producing rebar, the highest since 2011, spurring them to fire up furnaces, analysts said.
On Feb. 27, steel rebar futures rocketed to 3,648 yuan ($527.41) per tonne, their highest in three years. That's up 60 percent since September.
The burst of activity and soaring prices are undermining the government's years-long push to cut capacity in its bloated steel sector to make the industry more efficient and tackle smog. Beijing's crackdown has mainly targeted low-grade products like rebar.
On Sunday, the government announced plans to slash another 50 million tonnes of capacity this year, on top of the 65 million removed last year.
However, many of the plants closed last year were already idled and output from the still-open plants actually rose 1.2 percent to 808.4 million tonnes.
The tailwinds are about to turn into headwinds as rising inventories point to oversupply.
Last month, rebar stockpiles across 35 major cities MYSTL-IRBC-35CT hit 8.7 million tonnes, their highest in almost three years, data from consultants Mysteel showed.
Dong Caiping, chairman of Zenith Steel in eastern Jiangsu province, said he is "worried" the market will be in oversupply by the second half as mills increase output due to bumper margins.
Soaring stockpiles of iron ore, a key ingredient in steelmaking, also highlight the trend, analysts say. Inventories CUS-STKTOT-IORE hit 127.9 million tonnes, their highest in at least a decade and equivalent to 1-1/2 months of imports, Custeel reported.
Most of that is low-grade ore, sidelined while mills rush to use higher-quality feed to maximise product and offset higher coking coal prices, according to Wood Mackenzie.
"Steel margins are quite healthy, so mills are trying to produce as much as possible. And using high grade ore will maximise steel production," said Rohan Kendall, principal iron ore analyst at Wood Mackenzie.
"We're not seeing enough government stimulus to justify the surge in prices." ($1 = 6.9168 Chinese yuan renminbi)
Reporting by Hallie Gu, Meng Meng and Josephine Mason in BEIJING; additional reporting by Ruby Lian in SHANGHAI; Writing by Josephine Mason; Editing by Christian Schmollinger