Steel sector still facing profitability problems
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.