Steel product prices in China will continue their current strong trend into the second half of the year, on the back of strong consumption and rising production costs, industry analysts said July 14.

China is set to consume 496.3 million tons of steel products this year, up 12.7 percent year-on-year on the back of growing demand from downstream industries such as real estate, automotive manufacturing and ship building, Luo Wei, an analyst for China International Capital Corp. Ltd., said in a recent research note.

Meanwhile, Luo forecast that China's crude steel production growth will slow this year compared to last. National crude steel production capacity is expected to increase by 30 million tons this year, equivalent to just 6 percent of current capacity.

China's crude steel production in the first five months of this year amounted to 216 million tons, up 9.4 percent year-on-year. However, the growth rate was 6.7 percentage points below that recorded for the same period last year, due mainly to the government's campaign to eliminate outdated production capacity, and the reduction of production by small steel mills that cannot afford rising iron ore and coke prices.

Domestic steel product prices will not drop from their current high levels in the second half of this year due to strong demand both in domestic and global markets, Qi Xiangdong, deputy general secretary with the China Iron and Steel Association (CISA) told reporters in an industry conference in Guangzhou City, Guangdong Province, last weekend.

China's apparent steel consumption amounted to more than 200 million tons in the first five months, up 16.2 percent year-on-year, a new three-year high, Qi said.

On robust consumption growth, China's steel product prices increased by 30.9 percent on average over the January to June period, while global steel product prices soared by 42 percent on average over the same period, according to CISA.

At the same time, domestic steel mills have seen their production costs grow dramatically due to iron ore and coke price hikes. Domestic coke prices have surged from last year's average price of RMB 1,200 ($175.88) per ton to now sit at RMB 2,400 ($351.75) per ton.

"As production costs, and especially energy costs, are staying high, small and medium sized crude steel producers, whose production costs are usually higher than large-scale producers, are unwilling to sell at low price levels. This will support prices," Luo said.

Though prices for steel products are expected to be strong in the next half of the year, Luo believes prices will see a short-term slack period in July and August, which is the country's traditional low consumption period.

Driven by rising steel product prices, China's steel mills achieved total profits of RMB 142.6 billion ($20.9 billion) over the first five months of this year, up 50.8 percent from the same period last year. The annual growth figure was also 12.2 percentage points higher than that recorded for the first two months of the year, the National Development and Reform Commission said July 14.