We know that China has been putting a lot of efforts into obtaining cheap iron ore for its steel mills. Hence a surge in industrial production in China, notably of steel.

The problem (again), is that the steel is sold on the market by traders who have entered into future contracts at prices much higher than the current market price (and the market price in itself gives an idea of the tepid recovery taking place, even in China).

As it is, the Steel mills have been charging extremely high prices on their production, while the local demand is weak, and international demand almost non-existing.

As often repeated in these chronicles, Q4 will be the time of truth, for steel as well, as overcapacity is starting to hit the steel production.

Steel traders have urged large mills to cut their prices to reflect the market conditions, Caijing learned from a trader’s conference on Sept. 20.

Steel prices have fallen since August and many traders have lost money on products purchased under contract at higher than current market prices.

The contract price of cold-rolled steel for October delivery from Baosteel, for example, is 6,300 yuan per ton, compared with a market price of about 5,600 yuan per ton, Liu Changqing, chairman of Beijing Lange Baiziwan Steel Market, said.

Liu Yong, general manager of Anhui Huishang Metal Co., said his company bought 90 percent of the steel for a new project though the local markets.

Large steel mills should base their prices on what’s happening in the market or it will be “hard for mills and traders to reach a consensus,” Xu Jianlong, head of Jiangsu’s steel commerce chamber, said.

Meanwhile, steel mills should guarantee traders a discount on the market price, Xu said.

A large proportion of the steel produced by large mills is sold by traders, who resell it on the local markets.

Li Jianshe, marketing manager with steelmaker Magang Group, said steelmakers always consider their own interests first when the market deteriorates.

Meanwhile, the fourth quarter will be the most difficult time of year for domestic steel mills because weak demand will be unable to absorb fast-growing output and inventories, according to the China Iron and Steel Association.

Prime steel output grew for seven consecutive months to August, reaching a record 52.3 million tons in the month, far above the 40.4 million tons in February. In early August, prices stalled abruptly after a four-month rebound as ballooning output began to outpace demand.