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Industry steels for price jump
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China's machinery manufacturing industry is expected to feel the pinch after mills hiked steel prices by larger than expected degrees in response to higher iron ore costs.

Pressure has been mounting on sectors from shipbuilding to engineering machinery production since steel prices started to rise last quarter, despite efforts by companies to increase exports and optimize product mix.

The impact of the higher costs would not be the same across the board, with each company's ability to hedge, raise their own prices and bargain for steel at better prices the key to the impact, said Zhang Jingcan, analyst at Guotai Jun'an Securities.

For China State Shipbuilding Co, its 2008 net profit would be cut by 15 percent if it didn't hedge against higher prices for steel which accounts for 25 to 30 percent of its costs, Zhang said.

Ship builders would have to wait up to two years before they could raise prices of vessels as they have to complete contracts already signed, although they have strong negotiation power with mills as they are key steel buyers.

A Guosen Securities analyst said given this situation, the shipbuilding sector could still outperform many other industries given the rising number of orders.

Earnings for machinery maker Sany Heavy Industry Co could be reduced by 7.2 percent without hedge, Zhang said. The company could mitigate the impact through internal cost control.

Steel accounts for 15 percent of Sany's costs.

Domestic steel prices entered a new wave of hikes after Baosteel Group Corp agreed on behalf of domestic mills to a 65 to 71 percent rise in 2008 iron ore prices with Brazil's mining company Vale last week.

Baosteel said it would raise second-quarter prices by as much as 20 percent to offset ore costs, joining smaller players in China and major rivals in Japan.

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