STEEL prices are likely to remain high in domestic and world markets in 2008 after last year's increases, and the alloy may also prove inflation-proof, say industry executives and analysts.

Rising global demand is adding to the pressures on costs, they say. Domestic output was disrupted by the snowstorms early this year, and stimulated by news of another jump in term iron ore prices for 2008.

China's steel product composite price index hit an all-time high of 135.17 at the end of February, up 8.86 points from January and 25.29 points from the year before, according to the China Iron and Steel Association.

The global CRU steel price index reached 200.9 points by the end of February, up 12 points from a month earlier and 43.8 points from a year earlier.

Baoshan Iron & Steel Co, China's top mill, has raised steel product prices for the first and second quarters this year, and will further increase prices for some products in May.

Wuhan Iron & Steel, another major mill, has raised prices for four consecutive months by a total of 20 percent.

"Steel prices in the domestic market are expected to remain at high levels in the second half while moving in a narrow range, with only a small chance of a major slump," Baosteel President Fu Zhongzhe said last Thursday in an online briefing about the company's earnings results.

Steel prices are "more demand-driven than cost-driven," CITIC Securities' chief steel analyst Zhou Xizeng said at a seminar hosted by industry portal Mysteel.com last Friday.

Baosteel's state parent Baosteel Group has agreed on behalf of Chinese mills to a 65-percent to 71- percent rise for 2008 term iron ore prices with Brazil's Vale, while talks with BHP Billiton and Rio Tinto haven't ended as the two Australian miners hold out for more money.

Zhou said that including freight rates, mills with long-term shipping contracts would only pay 35 percent more for Brazilian ore upon arrival in Chinese ports than a year ago. He said the impact of dearer raw materials has already been offset by price rises in the domestic market, and the future price outlook would mainly be sustained by demand.

There are four main forces driving up steel prices, say analysts - robust consumption in emerging markets, demand for upgrades in developed nations, China's production slowdown, and reduced exports. China produces about a third of the world's crude steel.

"We see rising prices for upstream resources like iron ore and coal, but no significant rises in steel inventories. All these are factors for further rises," Zhou said, adding that gross profit margin could be two percentage points higher for China's steel industry this year.

Zhou said steel companies in Europe and the United States have been outperforming their local benchmark indexes after the ore price rise announcement due to positive outlook for steel prices.

Mysteel analyst Jia Liangqun said at the same seminar that robust demand from developing countries and China were the main factors that will sustain high steel prices in 2008, despite a slowdown in global economic growth, higher costs and tight credit.

"Tight supply and dearer raw materials are curbing the growth in steel output, while the Beijing Olympics and the post-snowstorm reconstruction boom in the southern regions are helping to lift the demand," Jia said.

In Zhou's view, there is further room for steel price rises, taking lessons from the past. There has been a historic link between steel and oil prices, he explained, where steel prices per ton equals that of 20 barrels of crude oil.

But today, steel prices per ton equal only seven to eight barrels of oil, with the fuel now trading above US$100 a barrel.

Energy costs

Zhou said he chose oil prices as a reference because half the iron ore costs for Chinese mills come from shipping rates, and energy costs account for up to 25 percent of mills' production costs.

"We predicted last year that steel prices would break through US$1,000 per ton and now I think that won't be far away," he said. The current export price for deformed steel bars, used in construction, is about US$700 a ton.

Mysteel's Jia said steel prices of all kinds should be above 4,000 yuan (US$570.60) per ton in the domestic market, and prices may generally move between 4,500 yuan and 5,500 yuan for widely used hot-rolled products. Domestic prices are typically lower than global levels.

"We found steel also can be considered inflation-proof against the backdrop of rising inflationary pressure," CITIC's Zhou added.

However, Zhang Jianfeng, deputy general manager of Huafeng Steel, based in Zhengzhou, Henan Province, predicted sharp volatility in steel prices this year.

"This brings lots of opportunities for steel dealers, but also lots of risks," Zhang said.