Baosteel expects losses in stainless, carbon steel

PUBLISHED : Thursday, 30 October, 2008, 12:00am
UPDATED : Thursday, 30 October, 2008, 12:00am

Baoshan Iron and Steel (Baosteel), the mainland's largest steelmaker, warned yesterday its stainless steel and carbon steel businesses might post losses in the fourth quarter amid falling steel prices and weak demand.

The Shanghai-based steelmaker reported disappointing third-quarter earnings of 2.85 billion yuan (HK$3.23 billion), up 19.15 per cent from a year earlier but less than Morgan Stanley's estimate of 32 per cent growth. Turnover grew 12.46 per cent to 56.36 billion yuan.

For the first nine months, earnings increased 18.42 per cent to 12.49 billion yuan.

Baosteel's third-quarter earnings were substantially lower than in the two previous quarters, as its stainless steel business posted losses. It also made a 990 million yuan provision against its inventory of raw materials for stainless steel, mainly because of the fall in nickel prices.

In the first quarter, Baosteel posted a profit of 4.26 billion yuan. First-half profit was 9.65 billion yuan.

'In the face of a sharp drop in steel demand from customers, falling steel prices, a high-cost environment and pessimism about the global economy, the company will face even bigger challenges in the fourth quarter this year and first quarter next year,' Baosteel said.

As stainless steel and nickel prices continue to fall, Baosteel expects its stainless steel business to stay in the red in the fourth quarter. It expects its carbon steel business to also make a loss in the fourth quarter amid falling prices and may need to make a provision against related raw materials.

The mainland's steel prices have fallen more than 30 per cent from their peak in June.

Earlier this month, Baosteel announced a further drop in the prices of its major products for December contracts by up to 20 per cent, or from 1,000 to 1,700 yuan per tonne, compared with November contract prices.

The cut in December prices follows a sharp cut of 1,200 yuan a tonne in November prices. Its December contract price is below the spot price of about 4,800 yuan a tonne.

'Offering a December contract price below spot prices could imply that Baosteel expects spot prices to fall further and is keen to clear its inventory,' Morgan Stanley said in a report.

At the end of last month, Baosteel's inventory had increased 30.7 per cent to 52.14 billion yuan from last December's level of 39.89 billion yuan.

Analysts said mainland steelmakers might post losses in the fourth quarter and possibly in the first quarter next year.