China Iron & Steel Association said steel demand in China, the world biggest producer is expected to rise during the upcoming strong consumption season, but the government clamp down on liquidity may inject uncertainties in the market.
CISA said in its monthly report that "The monetary policy is likely to be tightened further to ease rising inflationary pressure which will cause capital shortage on steel enterprises and bring uncertainties on steel market demand."
China March inflation data showed consumer prices rising to 5.4% in the year to March, the fastest rate since July 2008. China has raised banks' required reserves for the fourth time this year underscoring the government determination to keep the economy on an even keel.
CISA also warned that China steel exports will face growing difficulty as demand growth in the world will slow and disaster hit Japan is also recovering which will lead to more imports of steel products from China.
The steady rise in the yuan will hurt steel companies' efforts to increase exports further. Steel exports from the world second biggest economy rose 20.7% for the first quarter from a year earlier.
CISA said "Steel inventories were still at high levels compared to that at the end of last year, adding that high production rates have led to rapid supply growth with the oversupply continuing to plague the world's top steel producer."
However, CISA predicted that steel prices will rise slightly in the near future, buoyed by improving demand in the strong consuming season and rising commodities prices amid stubbornly high inflation.
CISA added that "Steel demand is picking up in the coming season of strong consumption which will alleviate the surplus in supply and surging raw materials prices, rooted by rising global commodities prices and inflation in China will also support steel prices."
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