Angang expects return to profit on rising demand

PUBLISHED : Thursday, 20 August, 2009, 12:00am
UPDATED : Thursday, 20 August, 2009, 12:00am

Angang Steel, one of the mainland's top five steelmakers, expects to return to a profit for the full year as Beijing's stimulus revives demand and its raw materials costs fall from the first half, according to chairman Zhang Xiaogang.

Despite increased prices of its major products - between 150 yuan (HK$170.15) and 300 yuan a tonne yesterday for delivery next month - the Liaoning-based steelmaker holds a cautious attitude about the future.

Mr Zhang, speaking after the company reported a 1.55 billion yuan first-half loss, said it was hard to predict whether higher steel prices could hold through the full year, since the rebound might lead to oversupply and cause 'market turmoil'.

Since mid-April, spot prices of hot-rolled coil in Shanghai have risen about 30 per cent to a high of 4,300 yuan per tonne early this month.

Steel prices have risen more on the mainland recently than in the international market because of high demand. However output, which was low, is rapidly being ramped up, leading to fears of oversupply.

Based on daily production last month, the annualised output for the country would be more than 600 million tonnes. Since global output was expected to be only about one billion tonnes, it was obvious that overcapacity in China would be severe, Mr Zhang said.

His cautious tone came after spot prices of hot-rolled coil in Shanghai slumped about 900 yuan a tonne in the past two weeks, while some small mills started to cut prices.

Angang's price rises for delivery next month were also far less than bigger rival Baosteel's increases of 500 yuan to 600 yuan a tonne.

Analyst Hu Yanping expected spot steel prices to fall a further 200 yuan to 300 yuan and then rise again.

However, she said it was difficult to say whether they would return to this month's highs by the end of the year.

Nevertheless, Angang is confident of returning to the black. Current steel prices are still higher than in the first half, and the cost of iron ore is expected to fall in the second half.

The cost of iron ore bought from its parent company will be reduced to 578 yuan a tonne in the second half from 887 yuan in the first, according to executive director Fu Jihui.

Citigroup predicted Angang's gross profit margin would rise to 18.4 per cent in the third quarter and 18.5 per cent in the fourth from 11 per cent in the second quarter on lower materials costs and higher selling prices.