TOKYO, July 8: Japan's stainless steel market is expected to face a supply glut as domestic producers lose their share in the Southeast Asian market as a result of fierce competition among exporters, traders said on Monday.

Prices -- both of domestic stainless steel and dollar-based nickel -- are likely to be weighed down by the stainless steel supply surplus in Japan, traders said.

Of Japan's total nickel demand, about 60 to 70 per cent is used to make stainless steel.

Japanese imports of refined nickel in 1996 totalled 53,852 tonnes, according to finance ministry data.

"Japan needs to keep its exports at about 30 per cent of the total domestic stainless steel production (to keep the domestic market in balance)," a trader at a major trading house said.

"Japan previously nearly dominated Southeast Asia's stainless steel market, but now others are cracking the market. The Japanese are struggling to maintain their 30 per cent market share there," the trader said.

Industry sources said Japan's stainless steel output in calendar 1996 was estimated at around 3.2 million tonnes.

Traders said output this year may remain at around last year's levels as stainless steel production during the first half of 1997 was buoyant, reflecting relatively firm domestic demand during the period.

Taiwanese, South Korean, South African and European firms, have started to aggressively export stainless steel to Southeast Asia, triggering a fierce price war there, traders said.

With Japanese firms losing their Southeast Asian market share, traders said the outlook for the domestic stainless steel market was grim.

"If European firms export stainless steel to Southeast Asian countries at competitive prices in the summer, Japan's market will succumb to further pressure," another trader at a major trading house said.

The average price of stainless steel in Southeast Asia is currently around $1,700-1,800 per tonne on an f.o.b basis, down sharply from a peak of around $2,800 in 1995, traders said.

Dollar-based nickel prices are likely to drift lower in the near term, partly because Europe's stainless steel market is also expected to face a supply glut in the summer, they said.

"Dollar-based nickel prices are likely to be easier, testing about $6,800 in the near term," one trader said.

Nickel on the London Metal Exchange (LME) was quoted at around $6,990 per tonne on Friday.

In a bid to lift domestic stainless steel prices, some Japanese producers have reduced their stainless steel output this year.

Sumitomo Metal Industries Ltd, one of Japan's major stainless steel producers, reduced its stainless steel output by 10 per cent in the April-June quarter compared to the same period a year earlier.

A Sumitomo Metal spokesman said it was mulling whether to lower output this quarter, and that raising low domestic stainless steel prices was its top priority.

"For the July-September quarter, we are looking at supply/demand situation and are mulling whether to reduce production," a Sumitomo Metal spokesman said.

Most Japanese stainless steel producers are expected to remain in the red as domestic market prices remain weak, traders said.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.