Steel sec­tor still fac­ing prof­itabil­ity prob­lems

China Daily (Hong Kong) - - BUSINESS VIEWS - By DU JUAN du­juan@chi­

Chi­nese steel­mak­ers’ prof­its will re­main low next year as out­put re­mains high and de­mand growth slows, said in­dus­try ex­perts.

The rat­ings agency Moody’s In­vestors Ser­vice said on Wed­nes­day that its out­look for the Asian steel and coal sec­tors is neg­a­tive for 2014.

Ac­cord­ing to its jus­tre­leased re­port 2014 Out­look — Asian Steel and Coal, Over­sup­ply and Weak Prices Drive Neg­a­tive Out­looks — de­mand for steel will in­crease a mod­est 2 to 3 per­cent next year as the Chi­nese gov­ern­ment tol­er­ates slower gross do­mes­tic prod­uct growth and shifts eco­nomic growth driv­ers to do­mes­tic con­sump­tion from in­fra­struc­ture spend­ing.

“The Chi­nese gov­ern­ment’s push to cut in­ef­fi­cient steel ca­pac­ity will be credit pos­i­tive for most large steel producers in the re­gion. How­ever, un­cer­tain­ties re­main as to the tim­ing and the scale of the ca­pac­ity cuts,” said the re­port.

The se­vere over­ca­pac­ity prob­lem has been the big­gest ob­sta­cle for China’s steel in­dus­try, which has af­fected steel­mak­ers’ prof­its in the past few years.

The China Iron and Steel As­so­ci­a­tion pre­dicts that the steel in­dus­try’s prof­its in 2014 will reach 21 bil­lion yuan ($ 3.44 bil­lion), 12 times as much as the in­dus­try’s prof­its last year.

Howev e r, Xu Xiangchun, in­for­ma­tion di­rec­tor of in­dus­trial in­for­ma­tion con­sul­tancy Mys­teel, said the dra­matic growth of the profit will be caused by the ex­tremely low base in 2012.

China’s steel in­dus­try had a to­tal profit of 1.58 bil­lion yuan in 2012, a 98.22 per­cent year- on- year drop, caused by ris­ing iron ore prices and a weak mar­ket.

Li Xinchuang, head of the China Me­tal­lur­gi­cal In­dus­try Plan­ning and Re­search In­sti­tute, said most steel com­pa­nies suf­fered se­vere losses last year.

“There­fore, the profit growth based on last year’s losses is not mean­ing­ful for the whole in­dus­try,” he said. “In ad­di­tion, many steel com­pa­nies are mak­ing prof­its from their non-steel busi­nesses. If China’s steel out­put and ca­pac­ity can­not be ef­fec­tively re­duced, the com­pa­nies can­not re­al­ize real profit growth.”

For the first three quar­ters of this year, large and medi­um­sized steel com­pa­nies re­al­ized a to­tal profit of 11.3 bil­lion yuan, ac­cord­ing to the as­so­ci­a­tion.

Dur­ing the same pe­riod last year, th­ese com­pa­nies suf­fered a to­tal loss of 6 bil­lion yuan.

De­spite this, Li said it is still far from the worst pe­riod the in­dus­try had en­joyed.

Ac­cord­ing to an in­dus­trial re­port re­leased by the in­sti­tute last Fri­day, the growth rate of China’s steel de­mand will de­cline from 6.3 per­cent this year to 3.2 per­cent next year.

China will use 715 mil­lion tons of steel next year, which rep­re­sents a 3.2 per­cent yearon-year growth rate, said Li.

The steel use in many sec­tors in­clud­ing con­struc­tion, man­u­fac­tur­ing, ship­build­ing and auto-mak­ing will see slower growth next year com­pared with pre­vi­ous years.

Chi­nese steel­mak­ers’ con­fi­dence has been re­turn­ing since Novem­ber, said Wang Jin­hua, an­a­lyst at Mys­teel — but only in the short term.

She said a warm­ing macroe­con­omy will ease the con­tra­dic­tion be­tween the ex­ces­sive sup­ply and slow­ing de­mand at the be­gin­ning of next year.


A worker checks stain­less-steel cable at a base in Dalian, Liaon­ing prov­ince. The growth rate for steel de­mand will fall from 6.3 per­cent in 2013 to 3.2 per­cent next year.

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