Oversupply to see gloomy second half for Baosteel
Baoshan Iron and Steel (Baosteel) - the country's most profitable steelmaker - reported an 11.9 per cent year on year rise in interim profit yesterday, but the second-half outlook is clouded by gloomy market conditions.
The Shanghai A-share company reported a net profit of 1.59 billion yuan (about HK$1.48 billion) for the six months to June 30 despite a 1.8 per cent decline in turnover to 14.67 billion yuan.
Analysts believed the drop in turnover was a result of lower steel prices, which more than offset the growth in volume of steel sold. Mainland steelmakers are suffering from falling product prices stemming from the global economic slowdown despite steady domestic economic growth in the first half.
Increasing domestic supply in response to rising domestic demand also played a role in driving down prices.
An apparent failure by the government to contain rising steel output has resulted in a market glut despite growing demand.
'According to current analysis, conditions of both the domestic and international steel markets will remain subdued in the second half,' Baosteel said.
'Some products' selling prices are expected to fall from the first half's level, which will put even bigger pressure on the company's second-half operating targets.'
It expected further product price falls, rising price trends of some key raw materials and maintenance work on key production facilities, 'may see second-half profit lower than that of the first half'.
Baosteel made a provision of 16.21 million yuan for declining inventory prices in the first half, on total inventory of 2.21 billion yuan. This compared with a provision of 23.46 million yuan last year, on 2.42 billion of total stock.
Earnings per share were 0.128 yuan, down from 0.134 yuan a year earlier. No interim dividend will be paid.
Baosteel is not alone in the over-crowded market. H-share Angang New Steel - the Hong Kong-listed flagship of China's largest steelmaker - last week posted a 12 per cent decline in first-half net profit as it was forced to cut prices by an average 7.32 per cent year on year.
Yao Lin, general manager of the H share, had said stocks of the entire industry were estimated to have risen to a level equal to 20 days of national steel output from just several days at the beginning of the year.
Baosteel said it expected increasing foreign competition stemming from China's impending World Trade Organisation entry to stimulate demand for vehicle and consumer electronic appliances, resulting in a rise in steel demand.
It would seek to improve product quality and shorten delivery lead times to meet greater foreign competition, it added.
The company, which raised 7.7 billion yuan net proceeds last December via its A-share listing, said it aimed to complete a portion of its planned assets acquisition from its parent to reduce intra-group competition and connected transactions.
In the first-half, Baosteel completed the acquisition of cold-rolled sheets production facilities from its parent for 2.24 billion yuan.
During the first half, Baosteel sold 4.3 billion yuan worth of cold-rolled steel products - accounting for 29 per cent of total sales, up 11.6 per cent from the same period last year.
Sales of hot-rolled steel products amounted to 3.19 billion yuan, 22 per cent of total sales in the first half.
