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Baosteel

Shanghai Baosteel Group Corporation, usually known as Baosteel is a state-owned steel company which is one of the biggest steel producers in the world, based on output. Its 2000 initial public offering in Shanghai was the largest in China at the time even though it was restricted to domestic investors.

Steel sector losses grow despite price rebound

PUBLISHED : Tuesday, 30 December, 2008, 12:00am
UPDATED : Tuesday, 30 December, 2008, 12:00am

Steel companies on the mainland saw their losses widen last month and, despite recent price increases, analysts do not expect a solid industry rebound until the second quarter of next year.

The price of steel on the mainland has rebounded 10 to 15 per cent from its October low, prompting Baosteel to raise its product prices for February. Meanwhile, losses have mounted.

Figures from the China Iron and Steel Association show that 71 large and medium-sized steel mills had combined losses of 12.77 billion yuan (HK$14.34 billion), more than double the losses in October.

Forty-eight mills, including the leading companies, recorded losses, compared with 42 in October, when the industry posted combined losses of 5.84 billion yuan.

It was the first monthly loss in six years, as falling demand and lower prices amid the global economic slowdown ate into profit.

Zhang Shibao, an analyst at China Merchants Securities, said losses last month were larger than in October because of a 'time lag' effect, as products sold by big steelmakers usually reflect market prices a month earlier.

However, the problems had not been fully reflected in earnings, Mr Zhang said. Companies needed to make provisions against their inventories at the end of the year following the plunge in raw material and steel prices from their peaks in June.

Losses this month are likely to be higher than in the previous two months because stockpiles are still 60 per cent or higher than normal levels, even though they have declined from their peaks in August and September, he said.

Jiang Qiu, an analyst at Guotai Junan Securities, said provisions made by steelmakers at the end of September were far from sufficient to reflect the plunge in raw material prices and the prolonged inventory turnover delay.

'From purchasing raw materials to [turning them into] products and selling to customers, it took about 63 days in the third quarter, but this has increased to about 90 days in the fourth quarter,' Mr Jiang said.

Prices for iron ore and coking coal have slumped between 20 and 30 per cent this quarter. However, most steelmakers had made provisions of less than 10 per cent against their inventories by end-September. They needed to set aside much bigger amounts in the fourth quarter, thus hurting their earnings, he said.

Recent price increases at Baosteel and other major steel mills, as well as at smaller mills resuming production, suggested that demand was picking up, Mr Jiang said, adding a solid rebound would take time.

'I didn't see that demand from downstream customers such as car and home appliance makers has recovered,' he said, adding that the first quarter is traditionally a low season because of the Lunar New Year and cold weather.

Hu Shunliang, a spokesman for Maanshan Iron & Steel, said it would take more time to judge whether the market had rebounded, although his mill had resumed some production.

The Anhui steelmaker, which has cut production 15 per cent since October because of weak demand and falling prices, said it had resumed about 33 per cent of its production, with the utilisation rate at its plants now at 90 per cent.

'We'll monitor the situation to decide when to run full capacity,' he said.

Mr Zhang said even after last week's 6 to 8 per cent price rise, Baosteel's February product prices were still in line with current market prices. The Shanghai steelmaker announces its product prices monthly and about two months earlier than its peers.

'At February product prices, based on current raw material prices, Baosteel is still losing 500 yuan a tonne,' Mr Zhang estimated.

'The industry is bottoming out, and the worst seems over. Overall, I think it is likely the industry will suffer losses in the first quarter, as major mills are using imported iron ore, the price of which is higher than spot prices.'

Mr Zhang expected steel demand to be stronger in the second quarter, when Beijing's 4 trillion yuan economic stimulus package and other measures start to take effect.

Regaining strength

Solid recovery unlikely until the second quarter next year, say analysts

Mainland steel prices have risen from October lows by as much as: 15%

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