Chinese steelmakers thrive as raw material costs plunge
Profit margins at mainland mills rise to highest in 18 months on cheaper raw material prices
Mainland steel producers have seen their profit margins surge to the highest in at least 18 months on the back of sharply lower raw material prices and robust demand, a trend expected to continue in coming months, analysts say.
The profit rebound, after three years of losses, is also supported by relatively steady steel prices because of unusually low inventory.
"Given the low steel inventories at distributors and pollution-driven production controls in Hebei [province], the high margins could sustain themselves for some time," Barclays' analysts said in a report.
The cost of raw materials such as iron ore and coking coal would normally take a couple of months to show up in the bottom lines of steel mills as they depleted existing stock, so profit margins could improve further in the current quarter, Barclays said.
Hebei accounts for about 30 per cent of the mainland's steel output capacity and 45 per cent of its spare capacity, according to the report.
Iron ore prices fell 22 per cent in the past quarter because of excessive supply and a 19 per cent rise in imports in the first five months of the year, according to Standard Chartered analyst Judy Zhu, who expects more price weakness in the current quarter before a rebound in the next.
Inventory kept by steel traders was probably the lowest ever calculated on a days-of-use basis, after traders ran down stock amid tighter bank credit, according to a Citi research report.