Standard & Poor's

China's steel makers set for two more years of poor profits

Standard & Poor's says mainland producers face another two years of poor profits

PUBLISHED : Thursday, 06 September, 2012, 12:00am
UPDATED : Thursday, 06 September, 2012, 2:50am

Profitability of mainland steel producers will remain poor in the next two years in the severely oversupplied sector, unless Beijing comes up with a radical policy to consolidate the number of producers, according to credit rating agency Standard & Poor's.

Poor discipline in shutting excess production capacity was to blame for major losses in the mainland steel sector, said S&P's head of Asia Pacific commodities credit ratings, Suzanne Smith.

"Globally steel companies are all hurting, but the Chinese industry could be the worst off," she told reporters in a teleconference yesterday. "In Europe, a number of blast furnaces have been closed down, but we have not seen much of that in China."

She estimated that 10 to 25 per cent of the mainland's steel production capacity was not in use, and said the sector had seen overcapacity since 2005.

"Small and medium-sized producers, long [Beijing's] targets for closure, may continue to operate because they support local governments with tax revenue and employment," Smith said in a research report.

While Beijing has issued several rounds of industry policies with targets for the industry to consolidate and phase out inefficient and pollution-prone plants, implementation has been lacking at the local level, and "new radical measures" on consolidation is needed, the report said.

In the first seven months of the year, year-on-year output growth slowed to 2.1 per cent from 7.3 per cent last year, as Beijing reined in lending to the property sector to check rising prices, while big steel-consuming sectors like cars and home-appliances also saw sluggish demand. The demand slowdown and oversupply have caused the prices of major steel products to fall by 22 to 29 per cent from a year earlier.

With the decline in prices of key raw materials - iron ore and coking coal - lagging those of steel products, global steel mills suffered from drastic profit declines and even losses.

Meanwhile, a study from the Reserve Bank of Australia predicts China's demand for steel to build homes will not peak for 12 more years.

Researchers used projections of urbanisation rates, building size and construction quality to estimate that steel use would not peak until 2024, when it would be 30 per cent higher than last year.