THE country's stainless steel makers are cutting output and building stocks this month as weak demand squeezes profits and many big producers are chopping spot sales for May in half compared with April, trade and company sources said yesterday.

China's two largest stainless mills, the parent companies of Shanxi Taigang Stainless Steel and Baoshan Iron and Steel Co., are among those that have halved their spot sales volumes for this month, along with the China units of the world's No. 4 steelmaker POSCO, the sources said.

Chinese stainless steel makers had already been trimming output and accumulating stocks since mid-2007 as they grappled with sagging product prices and volatile raw material costs. But weakening demand, as tighter credit bites into the business of domestic users, has forced more drastic measures.

"Taiyuan Iron and Steel is only offering around 30 percent of its usual spot sales in May, after cutting by 50 percent from April," a trader said. Taiyuan Iron and Steel Group, parent of Shenzhen-listed Taigang, produced more than 2 million tons of stainless steel in 2007.

The mills decided on the sales and production cutbacks late last month, the sources said, although they declined to provide details on production volumes.

"We are talking about losses, not declining profits," said a sales manager at one of the two top steelmakers.

The price of 304-series stainless steel, a high nickel-content cold-rolled product highly popular for use in home appliances, is trading at about 31,000 yuan (US$4,437) a ton in the spot market, well below production costs, traders and company officials said.

Nickel, added as an anti-corrosive and strengthening agent, accounts for more than 60 percent of the cost of making the most popular 300 series of stainless steel, which contains about 9 percent nickel.

Nickel was quoted in a range between 235,599 and 239,000 yuan in Shanghai's spot market Monday, indicating a production cost for 300 series stainless steel of at least 35,000 yuan a ton.

The London nickel price MNI3, which hit an all-time high of US$51,800 a ton in May last year, had fallen 45 percent from the peak to US$28,400 a ton Friday. But rising prices of fuel and iron ore are eating into profits in the global steel industry, including the stainless steel sector.

Baosteel, China's top steelmaker, posted a surprise drop in 2007 net profit after its stainless steel operations fell into the red.

China, the world's top producer of both carbon steel and stainless steel, is expected to boost stainless output this year to 9 million tons from last year's 7.5 million tons, analysts said.

They expect about half would be low-nickel stainless steel, up from about 40 percent last year, as several producers take advantage of technological advances for low-nickel steel to cut costs. (SD-Agencies)