Wall Street Journal reported that reported that profit warnings from Angang Steel Co and Maanshan Iron & Steel Co sent shares of the two Chinese steel makers plunging on Tuesday, as investors fretted that a softening property market as well as higher raw material costs would continue to weigh on their profitability.
Hong Kong and Shenzhen listed Angang Steel said in a statement that it expects to swing to a net loss of around CNY 2.15 billion for 2011 compared with a net profit of CNY 2.04 billion year earlier as the increase in prices of raw materials and fuel have more than offset the pick up in steel prices.
It said certain furnaces have temporarily suspended production for repair and maintenance, which have also led to the loss.
Angang Steel profit warning came after rival Maanshan Iron said on Monday it expects its 2011 net profit to fall more than 50% from CNY 1.10 billion the previous year because of weakening demand for steel products as well as higher prices of fuel and raw materials, such as iron ore key material in steel making.
Blue-chip aluminum producer Aluminum Corp of China Ltd or Chalco also said in a separate statement on Monday it expects its 2011 net profit to have dropped more than 50% due to higher electricity costs and a sharp fall in aluminum prices in the fourth quarter on the back of the euro-zone debt crisis.
China steel mills and aluminum producers have benefited from heavy infrastructure spending and robust growth in the nation's car sales and consumer electronics markets before the financial crisis in 2008.
However, Beijing tightening measures to curb overheating inflation since last year has weighed on demand from the auto sector as well as housing and construction industries, prompting a massive sell-off in China's basic materials stocks.
Shares of Angang Steel, whose market capitalization halved in 2011, tumbled as much as 12% to an intraday low of HKD 5.48 in early morning session trade. At 11am local time, its losses narrowed to 10.4% at HKD 5.61 while Maanshan Iron dropped 9.3% to HKD 2.64. Shares of Chalco were 4.1% lower at HKD 3.77 narrowing from a 9.9% intraday decline in the early morning session.
Analysts expect 2012 to be another tough year for Chinese steel makers as high iron ore contract prices as well as overcapacity will continue to weigh on their profitability.
Brokerage Goldman Sachs said after downgrading Angang Steel to a Sell from Neutral that "We believe severe overcapacity and low self-sufficiency in iron-ore and coking coal could result in Chinese steelmakers facing a prolonged period of close to trough-cycle margins."
Angang Steel is based in Anshan, Liaoning province, and is the listed unit of Anshan Iron & Steel Group Corp. It produces steel plates, small H-shaped steel, train wheels and wheel rims.
(Sourced from Wall Street Journal)
