Giant steel companies will make bigger profits while smaller ones face going to the wall during the nationwide power-rationing policy that started in September, industry insiders said.

Baosteel Group Co set a price of 150 yuan (US$22.49) to 300 yuan a ton for crude steel selling in October. The price of other products including hot rolls, cold rolls and hot-galvanize rose between 100 and 350 yuan a ton.

Zhang Lin, an analyst from Lange Steel Research Center, estimated that Baosteel will raise the price of flat steel products by 500 to 600 yuan per ton on the current price by the end of this year.

Prices of industrial raw materials will go up in the short term due to the Chinese government's power-rationing policy to meet its energy-saving target, which began at the beginning of September, said the industry analyst.

A market insider who declined to be named said other giant steel mills would increase their prices soon because of the decrease in steel production since September.

"Steel products might have risen in price but a decrease in the cost of iron ore on the world market in the fourth quarter helped improve the profits of domestic giant steel mills," she said.

The prices of cement and coke products are also increasing because of the power rationing.

The cement price rose 19 percent from 260 yuan a ton to 310 yuan a ton in September due to increasing market demand and less production.

"If the power rationing policy continues until the end of October, it will have a seriously negative effect on the industry," Zhang said.

Analysts say it is hard to predict how hard the impact will be because there is no timetable set for the power rationing.

Lin Boqiang, director of the research center of China energy economics at Xiamen University, said the cost reduction in raw materials because of the rationing would affect the producer price index (PPI) and then the consumer price index (CPI), so inflationary pressure may be even higher over the rest of the year.

"The price increase of steel will gradually affect the automobile, electrical appliance and real estate sectors if the rationing continues," Zhang Lin said.

Zhang estimated that the cost of an appliance will increase 3.8 percent every time the unit price of steel goes up 10 percent. As a result, the coming months will see a challenge both for producers and consumers.

"I believe the power rationing is not a long-term policy for the reduction of carbon emissions. However, the policy reflects the central government's resolve to fulfill its power target.

An officer at a steel mill in Tangshan in North China's Hebei province told China Daily that the local government ordered his mill to cut production by 50 percent on average. If they cannot realize the target by the end of December, tougher measures are very likely to be imposed.

Lin Boqiang said it would be better if a market-oriented mechanism was applied to the energy-saving target. Even if it was not, the government needed to come up with a long-term plan to hit the goal instead of just cutting off the power used in industrial production.

(China Daily October 18, 2010)