Baosteel works hard to court loyalty despite falling prices

PUBLISHED : Tuesday, 05 July, 2005, 12:00am
UPDATED : Tuesday, 05 July, 2005, 12:00am


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Last week, Baoshan Iron & Steel agreed a compensation plan with minority shareholders likely to be left out of pocket by future sales of state-held shares, boosting its stock price 10 per cent.

Now the company must show it can prosper despite tumbling steel prices if it is to retain investors' loyalty.

Baosteel has long been a favourite with investors looking for a direct play on the country's economic development.

Two years ago, when foreign institutions were granted permission to invest in the mainland's yuan-denominated stock markets, the very first trade executed by an overseas investor was a buy order for its shares.

At the time, investment in property, infrastructure and factories was growing at breakneck pace, and consumer demand for cars and white goods was strengthening fast.

As the country's biggest and most modern steel manufacturer, Baosteel was ideally placed to benefit and over the next six months the company's stock price soared 50 per cent.

Today Baosteel's stock is back at the levels when those first foreign investors bought in.

Sentiment towards the steel industry was hurt last year when Beijing slapped restrictions on new investments in key sectors. Then last month, the fear of big share sales by Baosteel's parent company helped push the stock price to its lowest in almost 18 months.

Under last week's deal, those fears have been deferred for two more years, but Baosteel's problems are not over.

With new plants beginning production but demand growth constrained by government limits on new investment, especially in the property sector, the mainland is facing a glut of steel.

Over the first five months of the year, crude steel production grew at a rate of 31.5 per cent, according to analysts at JP Morgan, while consumption grew just 17.6 per cent.

The State Council Development Research Centre warns the country faces a 43 million tonne surplus of finished steel this year. As a result, domestic steel prices have fallen between 10 per cent and 20 per cent over the past three months.

To make life more difficult for steel companies, exporting their way out of trouble is suddenly less of an option.

Last week, the authorities scrapped tax exemptions on steel destined for export to head off potential accusations of dumping from other steel-making countries.

Yesterday, Baosteel chairwoman Xie Qihua was doing her best to talk up the industry's prospects, pointing to an uptick in wire rod prices as evidence that demand is reviving and that prices are bottoming.

That seems optimistic. Prices for some similar simple products are now below production costs.

If Baosteel is to remain the investors' darling, it may soon have to begin shutting down capacity in its commoditised steels and focus more on the higher grade products in which it has a domestic technological advantage and for which demand remains strong.