Baosteel warns of rising costs, slowing demand

PUBLISHED : Friday, 29 August, 2008, 12:00am
UPDATED : Friday, 29 August, 2008, 12:00am

Baoshan Iron and Steel (Baosteel), the mainland's largest steelmaker, has warned that the industry will face higher costs and slower demand growth for the rest of the year.

The company issued the warning yesterday after reporting a better than expected 18.2 per cent surge in first-half profit.

'In the second half of the year, the steel market will face more uncertainties. Steel mills will face bigger cost pressure amid an increase in iron ore costs, tight supply and declining quality of coking coal,' chairman Xu Lejiang said in the interim results statement.

Demand for steel in some manufacturing sectors would slow as the impact of tightening measures the government launched in the past two years started to take effect, Mr Xu said.

However, as the country's economy grew at a stable pace while production costs rose amid global inflation, domestic steel prices should remain steady in this half, he said.

Although steel prices had fallen since early this month while Baosteel had cut product prices for the fourth quarter after three consecutive quarters of increases, steel prices should stay high, said Helen Lau, an analyst at Daiwa Institute of Research.

'Even after Baosteel slashed the price of its cold-rolled steel products by 300 yuan [HK$343] per tonne for the fourth quarter, it is still 900 yuan higher than the current market price, showing the company is confident of steel prices and expects a rebound,' Ms Lau said.

Baosteel's first-half net profit rose to 9.64 billion yuan from 8.16 billion yuan a year earlier, beating the 9.1 billion yuan median forecast in a Reuters poll.

The earnings growth was driven by greater output and steel prices. Baosteel sold 12.39 million tonnes of billets in the first half, up 14.4 per cent from a year ago.

Ms Lau said Baosteel's gross margin was 16.5 per cent in the second quarter, 1.5 percentage points higher than the first quarter, reflecting its ability to pass costs on to customers.

Baosteel raised prices of its major products 17 to 20 per cent on the quarter in the second quarter.

Ms Lau said the company's profit surged partly owing to a drop in write-down on assets to 41.1 million yuan from 864.8 million yuan a year earlier, mainly for its inventory because of a decline in nickel prices.

Second-half blues

Steel mills to face more uncertainty from effects of tightening

Baosteel posted an 18.2 per cent jump in first-half profit to, in yuan: yuan9.6b