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China May Become Stainless Steel Net Exporter in 2008

China, the world's largest producer of stainless steel, may become a net exporter of the corrosion-proof alloy next year, threatening a global recovery in prices.

Chinese steelmakers are "increasing capacity very quickly,'' which is outpacing domestic demand, Wang Chengxue, assistant to the general manager of Baoshan Iron & Steel Co.'s stainless steel unit, said yesterday in an interview in Taiyuan. Baoshan is the country's second-largest maker of the alloy.

A surge in exports from China may sour plans by global rivals such as Nippon Steel & Sumikin Stainless Steel Corp. and Outokumpu Oyj to increase production and prices to benefit from a rebound in demand. Domestic European prices began to rise last month after falling 49 percent in the first nine months.

"Global stainless steel prices will probably be under pressure with a new source of supply from China,'' Yang Baofeng, a Shanghai-based analyst at Orient Securities Co., said by phone.

Baoshan rose as much as 2.5 percent to 17.41 yuan, and traded at 17.11 yuan at 11:30 a.m. local time China, which overtook Japan as the world's largest producer of the alloy last year, may have 500,000 tons of stainless steel in excess of domestic demand this year, with the gap widening to 1 million tons in 2010, according to the China Special Steel Entreprise Association yesterday.

Stainless steel is used in auto parts, kitchen appliances and buildings.

Baoshan plans to produce 1.05 million tons of hot-rolled stainless steel coil this year, down 5.4 percent from 2006, Wang said. The company set a target to keep output unchanged next year.

"Demand is recovering as customers replenish their stockpiles,'' Wang said, "But I haven't seen any significant improvement in the fundamentals.''

Nippon Steel & Sumikin, Japan's largest producer of stainless steel, last month said it wants to resume full-capacity production in November after inventories in China, South Korea and Taiwan fell. It sold stainless steel sheet for 500,000 yen ($4,363) a ton in October, the lowest since September 2006.

Baoshan Steel's third-quarter profit declined, mainly because of falling prices and higher costs of nickel, used as raw material for stainless steel.

Baoshan Steel and Shanxi Taigang Stainless Steel Co., China's two largest producers of the alloy, may charge customers including Volkswagen AG a surcharge from January to pass on higher raw material costs, Wang said in the same interview.

The charge will be pegged to the cost of nickel, which rose to a record in May, he said.

"We want the customers to share the risks of volatile nickel prices,'' Wang said. "The market is unpredictable.''

Nickel for three-month delivery on the London Metals Exchange surged to a closing record of $51,600 a metric ton on May 4. It has averaged 73 percent higher this year than the prior period. The May record price deterred steel producers from further purchases, leading to a 39 percent decline in price since, and eroding the value of stockpiles bought earlier.

Baoshan sells stainless steel products to Volkswagen's China units and to A.P. Moeller-Maersk A/S, the world's largest shipping company.

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