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Problems at steel companies expected to worsen
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OVERCAPACITY, excess supply and sagging prices have taken Chinese steel firms from profit to loss in the first quarter, and the problems will get worse.
More than 45 percent of steel companies reported losses as growth hit an 18th month low of 7.4 percent.
Total losses stood at 2.33 billion yuan (US$373 million) against almost 8 billion yuan of profits in the same period of last year, according to yesterday’s report by the China Iron and Steel Association.
“The first quarter of 2014 was the most difficult quarter since the start of the century,” CISA Vice President Zhang Changfu said at a press conference in Beijing. Seasonally low consumption means steel firms find themselves in the doldrums.
At the end of March, inventories totaled 19.4 million tons, up 43.5 percent at the beginning of the year and deepening worries. Prices have flagged.
The China Steel Price Index stood at 94.83 at the end of March, down 11.28 percent year on year, and 1.7 percent from a month ago. The average transaction price fell 10.14 percent year on year.
Despite weak demand, output kept rising, though less quickly than a year ago. Crude steel output in the first quarter stood at 203 million tons, up 2.4 percent. Total sales revenues were 869 billion yuan, down 0.79 percent year on year.
According to a government work report in March, 27 million tons of production capacity must be cut in the sector this year, but things have not gone entirely to plan. The government placed strict controls on new steel output last year, but new projects are still coming.
“And this is worrying,” Zhang said.
Inventory growth was also fueled by private investment. Private fixed-asset investment totaled 71.6 billion yuan in the first quarter, up 6.65 percent year on year. Capacity added 90 million tons in 2012 and 40 million tons in 2013. Despite the reduction, investment remains high.
Government data show the top-10 steel firms only producing 40 percent of the nation’s crude steel, and the proportion is falling. Mergers and acquisitions among steel firms are badly needed to improve competence and manage output.
“To break the vicious circle, firms must turn their attention to product quality and categories, with a view to low carbon, environmentally friendly products,” said Zhang Lin, a researcher at lgmi.com, a Chinese e-commerce service for the steel sector.
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