SINGAPORE (Dow Jones)--Chinese steel mills are planning further production cuts because of a lack of export orders, according to Macquarie Bank.

Macquarie said in a report issued Monday that according to traders, export orders for October have "collapsed," with South Korean importers facing financing problems.

"Because exports account for well over 10% of Chinese production, such a dramatic decline in exports must be a major factor in the production cuts," it said.

Official data showed that China's steel production fell 9.1% in September.

"During a visit to Tanshan, Hebei last week (which is regarded as the steel capital of China), we learned that nearly all independent rollers have suspended production since the beginning of October, and most integrated steel mills are running at 30-50% of their normal capacity, with large layoffs taking place," Macquarie reported.

The report notes that Chinese domestic steel prices have fallen by around 40% since late July. Rebar was reported at $528.13 a metric ton, including VAT, on Friday.

Macquarie said steel production could bottom out in November/December, and private steel mills without long-term iron ore contracts are likely to recover first as they will be able to take advantage of lower spot iron ore and coking coal prices to produce steel profitably.

The outlook for large steel mills is less positive, with long term contracts for raw materials now looking like a "burden" rather than an advantage, it said.

The Indian 63.5% iron ore price dropped to $76/ton on a cost, insurance & freight basis, last week from its peak of $155/ton set in April, it said.

Macquarie expects steel prices to rebound around the end of the year.

"We do not believe that underlying consumption is as bad as current demand, and the cuts in steel production should serve to tighten the market when demand returns," it said.

 
   -By James Campbell, Dow Jones Newswires; 65-64154-082; [email protected] 
 

(END) Dow Jones Newswires

October 26, 2008 23:34 ET (03:34 GMT)


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