Bloomberg reported that Baoshan Iron & Steel Co and Angang Steel Co posting the best quarterly profit in at least a year now face slower growth as oversupply in the world largest steel producing nation reduces prices.
Baoshan the largest Chinese mill said demand is easing amid rising pressure from overcapacity. Angang Steel Co said on October 27th that earnings this quarter will be less than net income in the past three months.
Benchmark Chinese steel prices have fallen 21% from a 10 month high on August 4th as production overwhelmed demand fueled by the nation CNY 4 trillion stimulus spending. Steel output in China reached highs in four months this year spurring record imports of iron ore from producers such as Rio Tinto Group and Vale SA.
Mr Fu Hao a Guangzhou based fund manager at E Fund Management Co which manages the equivalent of about USD 16.1 billion said “The severe overcapacity creates cutthroat competition among Chinese steelmakers, giving them little pricing power. There is good steel demand but prices are bad because of the excess competition.”
Baoshan gained 1.3% to close at CNY 6.84 in Shanghai. Liaoning based Angang the second largest Chinese mill by market value rose 2.4% to HKD 14.70 in Hong Kong.
The nation industry ministry said steel inventories held by large Chinese companies rose 10% this year to 7.2 million tonnes as at the end of September. BHP Billiton Ltd the world largest mining company said it was seeing signs of a pullback in commodity demand from China.
1. Rising Pressure
According to the mean estimate of three analysts compiled by Bloomberg Shanghai based Baoshan Steel may post earnings per share of CNY 0.13 in the Q4 down by 24% from the CNY 0.17 for the three months ended September 30th. Baoshan Q3 profit was its highest in five quarters.
Baoshan Steel said in its statement “There is rising pressure from overcapacity and demand growth is slowing down. Steel inventories are at high levels. Demand is weak for steel pipes and heavy plates in the fourth quarter.”
Angang Steel may report a profit of as much as CNY 1.17 billion or lose as much as CNY 330 million in the three months ending December 31st based on figures derived from a range of full year forecasts. Q3 net income was CNY 1.89 billion the highest in a year.
2. Close to Costs
Goldman Sachs analysts led by Mr Song Shen said after a conference call with executives that Baoshan and Angang Steel are cautious on the sector, mainly on capacity oversupply concerns. Producers cautious stance is in line with our expectation as they are facing close to cash cost level prices.”
Morgan Stanley analyst Mr Charles Spencer said Maanshan Iron & Steel Co the second biggest Chinese mill listed in Hong Kong probably had its best earnings for the year in the Q3. The mill said October 27th that Q3 profit rose 2% to CNY 802.3 million.
Mr Deng Qilin chairman of the steel association said the Chinese government is working on plans to close obsolete mills and promote mergers. Some mills have incurred losses at current prices which won’t rebound this year.
Baoshan has cut monthly prices twice since September. Hebei Iron & Steel Group, China’s second-biggest mill, and Jiangsu Shagang Group Co. have also dropped prices.
Jiangsu Shagang the nation fifth largest mill said this month Chinese steelmakers will be forced to cut output for the rest of the year. Steel demand growth in China may slow to 5% next year down from an expected 19%% this year.
3. Full Capacity
Goldman Sachs said the steel mills are still seeing strong demand from builders and makers of cars and appliances. Baoshan and Angang have orders covering 100% of capacity to the end of the year.
The National Development and Reform Commission said last month that Volkswagen AG, the biggest overseas carmaker in China sold a record number of vehicles in September in the country. The Asian nation may boost sales 28 percent to 12 million units.
Mr Luo Wei an analyst with China International Capital Corp said “Demand for steel is still good, but an industry overcapacity will keep prices at low levels.”
(Sourced from Bloomberg)
