Chinese steel prices continued to fall this week with traders struggling to justify purchases amid a domestic credit crunch and uncertain demand.

Rebar prices in Shanghai stood at 4,650-4,660 yuan (S$899.80- $901.71) per tonne on Thursday, down 110 yuan since last week.

"We aren't buying until we have a better idea what demand will look like in the next few months, but the spike in prices in the first two months of the year looks to be unsustainable," said a steel trader based in Beijing.

The most traded rebar contract for October delivery on the Shanghai Futures Exchange fell 1.6 percent over the week to close at 4,813 yuan per tonne on Thursday. Prices have now fallen 8 percent since peaking at 5,230 yuan on Feb. 11.

Henry Liu, commodities analyst with Mirae Asset Securities in Hong Kong, said the critical problem for steel traders now was the availability of credit.

"The interest rate hike hasn't been so awful for traders as long as the commodity prices are high, but the really painful thing is the credit crunch - steel traders cannot borrow money," he said.

Soaring inventories are also serving as a deterrent.

Output has been high with small private mills, encouraged by higher margins, finally breaking free of the punishing power supply restrictions imposed upon them in 2010.

But sales have not risen to match the increased production, pushing stocks up by a quarter in the first 20 days of February, according to figures issued this week by the China Iron and Steel Association.

Traders have suggested that speculative activity was primarily responsible for the surge in prices not only of steel but also iron ore in January and February, and the market is now seeing a correction.

But demand is unlikely to collapse, especially as the government commits itself to a programme of affordable housing construction across the country.

"We are still expecting a soft landing for the steel sector - the risk would be the government overtightening the market,"said Liu.

Asiaone