* 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 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
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
"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
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
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.
TAILWINDS TO HEADWINDS
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
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,
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)