March 6 (Bloomberg) -- Baosteel Group Corp., China’s largest steelmaker, said prices are close to its production costs, indicating that the country hasn’t had a “real” demand recovery.

Baosteel is “cautious” about the demand outlook, Wang Jing, the company’s general manager for international trading, said in an interview in Beijing, while attending the National People’s Congress.

Benchmark steel prices in China jumped 46 percent between November and February on optimism that the government’s 4 trillion yuan ($585 billion) stimulus package would revive metals demand. The price recovery was because of traders replenishing inventories, Wang said today.

“Demand hasn’t had a substantial recovery, but output rose faster because of higher prices,” Wang said. “Our prices are on the verge of production costs.”

Baoshan Iron & Steel Co., the listed unit of Baosteel, dropped 1.8 percent to 5.49 yuan in Shanghai trading at 1:21 p.m. local time.

Chinese steelmakers may have to cut output by 20 percent, Shougang Corp., the eighth-largest mill, said yesterday. More than 60 percent of the mills in China are making losses, the China Iron and Steel Association said last month.

Baoshan was profitable in January and February, and will probably make money this month based on orders received, Wang said. Baoshan cut April prices, the first drop in three months, by as much as 5.3 percent, according to Mysteel Research Institute on March 3. Baoshan’s prices are still above market rates.

Price Cuts

“If we gave our prices a one-time cut to match the market levels, we’re afraid that would hurt the market confidence,” Wang said.

The government’s stimulus plan may increase steel demand by 50 million metric tons, Wang said, citing industry estimates. She didn’t give details. Still, the stimulus probably won’t have much impact on Baosteel because its products are used in consumer goods like cars and appliances, rather than in construction, she said

The government is planning to build infrastructure projects, such as railways and ports, to support an economy hurting from slumping exports.

The worst may be over for Chinese automakers as their inventories are now lower than in the fourth quarter, Wang said. Steel demand for shipbuilding may take longer to recover because of the global recession, she said.

Baosteel plans to export 10 percent of its production this year, similar to 2008, she said, without giving details.

To contact the reporter on this story: Helen Yuan in Shanghai at hyuan@bloomberg.net

Last Updated: March 6, 2009 00:58 EST