Shanghai Steel Tube banks on increased output for more profit

NEWLY listed Shanghai Steel Tube is hoping its production expansion plan - which will be completed over the next two years - will enable the firm to achieve an extra earnings bonanza.

Chairman Gong Hongling expected the company's profit would increase by 40 per cent when its manufacturing facilities for pressure boiler steel tube and seamless steel tube for the chassis of Volkswagen Santana saloons began operation in 1995 and 1996, respectively.

Shanghai Steel will provide Shanghai Volkswagen Automotive with precision steel tubing for the Santana saloon in line with the drive by Beijing to encourage the use of mainland-made components.

Ms Gong estimated that the company's profit would grow by more than 10 per cent this year, despite the relative stable price for steel products in the first six months.

She said prices of steel products had been steady since the middle of last year, following Beijing's announcement of an austerity programme to curb the spiralling property market and control runaway inflation.

Shanghai Steel Tube had already secured orders for 40,000 tonnes of seamless steel tubing until August this year, 10,000 tonnes more than the company's half-year production capacity, indicating that market demand remained strong, said Ms Gong.

Ms Gong said Shanghai Steel would achieve the earnings growth by cost reductions and an increase in production capacity.

Production of seamless steel tube, which gives higher profit margins, accounts for more than 55 per cent of Shanghai Steel's turnover. The firm has more than 4,000 product lines.

She said the pricing of steel products in the second half of the year would depend much on China's ensuing economic development.

But she was confident because she said the steel tube was mainly used by key industries, such as energy and transport, which were not affected by the country's economic tightening policy.

''The key projects will even develop at a faster pace,'' she said.

Ms Gong said the company was negotiating joint ventures with US and German companies for the production of steel tubing, and that details are expected to be finalised in the next few months.

The firm was discussing a venture to produce electricity conduit tubing with a US company, in which the US partner would take an 80 per cent stake.

The venture would export 30 per cent of production, she added.

Shanghai Steel Tube had not sold products overseas for the past three years as it had focused on catering for domestic demand.

Ms Gong said the company planned to expand in overseas markets and it was applying for an autonomous right to import raw materials and export finished products.

Ms Gong was in Hong Kong yesterday after a trip to Korea to promote the company's stock, which was listed as a B share counter in Shanghai late last month. Five per cent of the company's shares have been placed with Korean investors, through Daewoo Securities.

The stock has plunged 17 per cent from its issue price during the past month amid mainland economic uncertainties and a general drop in the Asian equity market.