Leading steelmakers to see profits plunge

PUBLISHED : Tuesday, 14 April, 2009, 12:00am
UPDATED : Tuesday, 14 April, 2009, 12:00am

The extent of corrosion in the mainland steel sector should become clear this week as Angang Steel and Maanshan Iron & Steel are expected to announce dismal earnings for last year as prices collapsed amid an intensifying economic downturn.

The two heavyweight steelmakers could report that net profit plunged 39 and 47 per cent year on year respectively.

Investors are bracing for the worst after the mainland steel industry lost 47.7 billion yuan (HK$54.1 billion) in the fourth quarter last year.

The average forecast of 22 analysts polled by Thomson Reuters is a slide in Angang's net income to 4.62 billion yuan last year from 7.53 billion yuan in 2007. They expected revenue to have climbed to 75.84 billion yuan from 64.53 billion yuan.

Expectations for Maanshan Iron were not much different. Net profit may have plunged to 1.3 billion yuan from 2.47 billion yuan, the analysts estimated.

Angang will announce its results today and Maanshan Iron tomorrow.

'Apparent consumption in China's steel industry has seen the most deceleration of all the commodities as weak demand meets destocking,' Credit Suisse analysts including Trina Chen wrote last month.

Angang and Maanshan Iron issued profit warnings earlier this year, citing higher raw material and fuel prices and substantial provisions to cover falling inventory values.

Angang said it might record a profit of 3.42 billion yuan, while Maanshan Iron said it could take in just 717 million yuan. Both forecasts were unaudited and calculated under mainland accounting standards.

The forecasts were each well below consensus targets and could be part of an attempt to set the bar low in a difficult operating environment.

But Baoshan Iron and Steel missed market expectations for its earnings by a long shot after a brutal finish to the year.

The mainland's top steel producer said last month that it lost 6 billion yuan in the fourth quarter, leading to a sharp decline in profit to 6.46 billion yuan last year from 12.72 billion yuan in 2007.

While the damage from 2008 continues to unfold, some investors are hoping that early signs of a recovery across the border may signal the worst is over for steelmakers.

'Steel companies' earnings visibility is improving, given much less volatile steel and raw material prices,' Felix Lam, an analyst at CCB International, wrote in a recent report.

'Production and sales volume will recover gradually later this year when the Chinese macroeconomy starts to revive.'

The National Development and Reform Commission has already announced plans to stabilise prices by cutting steel production 8 per cent this year to 460 million tonnes.

'The end of the destocking cycle, combined with an 8 per cent boost from the demand stimulus, would drive a powerful run for steel in the second half of 2009,' Ms Chen wrote.