Losses seen at steel firms but turnaround in sight
Hong Kong-listed Angang Steel and Maanshan Iron & Steel are expected to report first-half losses this week, but analysts are optimistic that the two mainland steelmakers could move back into the black for the full year amid rising steel prices and demand.
Liaoning-based Angang, which reported a 99.7 per cent plunge in first-quarter profit to 8 million yuan (HK$9.07 million), is expected to report a loss of 2.3 billion yuan for the first six months of this year, according to an estimate by Bank of America Merrill Lynch. It also forecast that Anhui-based Maanshan Steel will report a loss of 1.2 billion yuan for the six months to June.
The results are not expected to surprise the market as Angang in April warned it might post a loss of up to 2.99 billion yuan for the first half.
Maanshan Steel's first-quarter loss amounted to 899 million yuan.
China's steel prices staged a recovery from last November to early February because of restocking purchases by traders.
Hot-rolled coil prices in Shanghai, for example, rebounded 24.4 per cent from their lows of 3,400 yuan a tonne in November to their highs of 4,230 yuan in early February. Reinforcing bar (rebar) prices in Shanghai rose 18.5 per cent from 3,180 yuan a tonne in November to 3,770 yuan in early February.
However, steel prices fell again until mid-April due to the absence of a solid recovery in underlying demand from downstream users. As a result, steelmakers continued to lose money in the second quarter as average selling prices were still lower than production costs.
But steel prices have experienced a sharp recovery since April, driven by strong demand from downstream sectors such as property, infrastructure and vehicles.
From their lows in April, the price of hot-rolled coil in Shanghai had risen 30 per cent to 4,200 yuan per tonne on July 31, while the price of rebar had gained 34 per cent to 4,170 yuan per tonne.
The recovery in steel prices should help steelmakers narrow their losses in the second quarter and some of them, including Maanshan Steel, have already started making profit since June, said Colin Liang, an analyst at Merrill Lynch.
Long steel products, such as rebars, which make up more than 59 per cent of Maanshan Steel's total volume, will continue to benefit from government infrastructure spending and stronger steel demand from property development, he said.
Mr Liang expected Maanshan Steel to report a full-year profit of 582 million yuan this year and 3.62 billion yuan next year, and Angang, a full-year profit of 886 million yuan this year and 8.37 billion yuan next year.
JP Morgan analyst Frank Li expected Maanshan Steel to report a full-year profit of 1.154 billion yuan this year and 2.69 billion yuan next year, while he projected Angang's profit at 1.8 billion yuan this year and 6.01 billion yuan next year.
Mr Li said steel demand from downstream industries, including cars, infrastructure and real estate, was stronger than expected. He has raised his forecast for China's crude steel demand by 11.3 per cent to 540 million tonnes this year and 10 per cent to 583 million tonnes next year.
'We believe China's proactive monetary policy has proven effective in bringing about increased industrial output growth, thus setting the stage for a recovery in many of steel's downstream sectors,' he said.
Beijing's aggressive fiscal spending programme is boosting domestic steel demand, especially for long products, he added.
Apart from rising steel prices, steel output is growing in the world's largest steel-producing country.
The mainland's crude steel output reached its highest monthly level this year in July of 50.68 million tonnes, up 12.6 per cent year on year. Both small and big mills are operating almost at full capacity to take advantage of strong prices.
Moreover, major steel mills are raising their prices for this month and next. Baosteel Group, the mainland's top steelmaker, has raised September prices by as much as 15 per cent for major hot-rolled and cold-rolled products.