Angang Steel says it expects slower growth in steel demand on the mainland in the second half and anticipates a squeeze in industry profit margins as production costs rise faster than product prices.
Growth in mainland steel consumption was expected to ease to 13 per cent in the second half from about 16.3 per cent in the first, said Fu Jihui, executive director and board secretary of the Liaoning firm.
Production costs at steel mills were expected to continue to rise in the coming months and would negatively affect industry margins, including Angang's, Mr Fu said.
Angang's average iron ore costs in the first half increased about 160 yuan (HK$182) or 16.8 per cent to 1,112 yuan per tonne while its coking coal costs almost doubled to 1,800 yuan per tonne now from an average of 990 yuan in the first half.
The average selling price of Angang's products in the third quarter rose to between 5,800 yuan and 5,900 yuan a tonne, up 13.5 per cent from 5,200 yuan in the first half. However, the rise in product prices was slower than the rise in costs, Mr Fu said.
The company's gross margin was 28 per cent in the first half.
Iron ore and coking coal, the main ingredients in steelmaking, accounted for about 60 to 70 per cent of steelmaking costs, said Xu Xiangchun, chief information officer for steel data provider Beijing Ganglian Maidi e-Commerce.
Steel company profits would peak this year as steel prices softened in the second half, Citigroup said.
The investment bank cut its forecast for mainland benchmark steel prices by 11 per cent for next year and 2010, and expected prices to be flat going forward. They have gained 33 per cent this year.
Reflecting its bearish outlook for steel prices, Citigroup cut its forecasts for Angang's earnings by 23 per cent to 8.74 billion yuan next year and 31 per cent to 9.21 billion yuan by 2010.
Both are lower than its earnings forecast for this year of 10.69 billion yuan.
Angang on Monday reported a better than expected 24.8 per cent jump in first-half profit to 5.99 billion yuan after it raised prices to benefit from higher demand.
Meanwhile, Mr Fu said the firm's new 5-million-tonne steel mill being built in Bayuquan, Liaoning, would cost more than previously estimated because of rising raw material costs.
The company has spent 26 billion yuan on the project, which was originally budgeted at 22.6 billion, and may spend a further 2 billion to 3 billion yuan.
Shares of Angang Steel fell 3.01 per cent yesterday to HK$10.30.