It is reported that China steel gloom will be coming. Listed steel mills in China are expected to report either declining profit growth or losses for the first half-year period due to sluggish demand, lower steel prices and over capacity.

Twenty-seven listed steel firms have forecast a less-than-rosy performance in the first-half; with 15 companies forecasting losses and 12 predicting declining profits compared to the same period in 2008.

The 27 steel mills, cumulatively, expected to post a loss of 9.64 billion yuan ($1.41 billion), compared to a profit of 36.3 billion yuan during the same period last year.

Angang Steel, which forecast a loss of up to 2.99 billion yuan, ranked as the top loss-maker among the 27 firms.

The company had reported profits of 5.98 billion yuan during the same period a year earlier, helped by markets hungry for steel thanks to the booming domestic economy. It had also reported a profit of 8 million in the first quarter of 2009, indicating that the performance could worsen in the second quarter.

Besides Angang Steel, Baogang Steel, Panzhihua New Steel & Vanadium Company, Taigang Stainless Steel all reported a loss forecast of over 100 million yuan.

“The Chinese steel industry was in the red for the previous seven months until May,” said Wang Xinguang, a steel industry investment manager at private equity firm Hao Capital. “Two-month profits cannot compensate for the loss in the first half-year.”

Chinese steel mills signed an annual iron ore contract at $93 per ton in 2008, up 78 percent from 2007, but in the latter half of 2008, the economic meltdown shrank steel demand and steel prices plunged. As a result, steel mills now cannot charge more to cover their raw material costs, he said. This factor contributed significantly to the loss forecast, he said.

Fan Haibo, a steel analyst at Beijing-based Xinda Securities, said most listed steel firms produced high value-added steel products such as plates, which were usually not in high demand during a downturn.

Small private steel firms produced construction material like deformed steel bars and were more profitable than listed steel mills, he said.

It is reported by the China Iron and Steel Association that China’s steel demand was picking up steadily, driven by the recovery of the manufacturing and property sectors.

It is said yesterday by a key official with the steel industry lobby that China would rather give up on annual negotiations for iron ore pricing contracts than accept the 33-percent cut proposal. The official also confirmed that the latest round of talks would see some progress within the next 10 days.

“CISA has put the foot down and will not compromise on its stance. You will see the result in around 10 days,” Li Xiaowei, vice-chairman of the China Iron and Steel Association (CISA) and chairman of the State-owned Hunan Valin Iron & Steel Group, said.

“We will ask for a better rate, otherwise we would rather give up on the annual negotiations for iron ore pricing,” he told China Daily at an Australia-China investment forum.

“Supply and demand rely on each other like teeth and lips. Those who only chase monopoly and windfalls will eventually lose more,” Dow Jones also quoted Li as telling reporters on the sidelines of the forum.

China, as the world’s largest iron ore buyer, needed 450 million tons of iron ore annually, and should have the right to decide its price, he said.

Chinese media reported earlier that some major steel mills, including Baosteel and Hebei Iron and Steel Group, had agreed with Rio Tinto and BHP Billiton on a 33-percent cut in iron ore prices.

Li Qingyu, general manager of Baosteel Resources Co, said he was not informed about the deal, adding iron ore supply exceeded current demand.

CISA rejected a 33-percent price reduction that Japanese and South Korean mills agreed to in May, and held out for a 40-percent cut.

The negotiations, which missed their June 30 deadline, became more uncertain after four employees of Rio Tinto were detained on charges of espionage just a few weeks earlier.
Steel analysts too believed CISA’s stance was not pragmatic.

“After Japanese and Korean mills, even some Chinese steel mills have accepted the 33-percent discount. China’s bargaining chips are falling,” said Yan Song, a steel industry investment manager at Hao Capital.

He said China’s steel industry was disadvantaged in annual iron ore negotiations due its low industry concentration.

The output of the top 10 Chinese steel mills stood at only 30 percent of its total steel output while the three global giant miners accounted for 70 percent of global iron ore trading.

Since the prices of iron ore and shipment are fluctuating, and are most likely to go up, steel mills will see fluctuating profits. If China gives up on the negotiations and turns to the spot market, the profits of steel mills may fall. According to Metal Bulletin prices, the iron ore spot price rose 4.6 percent to $91 a ton last week, the highest since October last year.

A lot of export oriented enterprises are seeking for the way out to get the rid of the hiking steel prices in Zhejiang Province. As the steel prices are on the rise, many traders do not plan to stock up steel products this year on the grounds of the yet to rally global market demands.

One of the traders in Zhejiang said “The steel products account for 70% to 80% costs in hardware products which would influence the latter a lot to some extent.”As per report, the price of steel products started moving upward earlier in April this year and more briskly in June up to CNY 4,300 per tonne from CNY 3,600 per tonne in early period.

As a matter of fact, some leading steel mills, like Angang, Benxi Steel, Wuhan Steel, Hebei Steel Group and Shagang etc have lifted their ordering prices by CNY 300 per tonne or more. And recently, Baosteel has revealed its July prices, with the major products up by CNY 200 per tonne to CNY 600 per tonne which is far beyond the previous market expectation of CNY 200 per tonne to CNY 300 per tonne.

Mr Wu Liyang GM of Special Steel Company said “Now, the supplying chain of the raw materials is over-concentrate. He said under the control of Zhejiang Zhongda Group Co Ltd the cooperation between Rio Tinto and BHP Billiton controlled the prices of raw materials which is certain to lead the price uptrend.”

Mr Wu noticed that “Furthermore, the profits space is shrinking. It is predicted that the cost expense will be added by 15%. Jumping prices may bring more capital circulation pressure to the enterprises. As a result, most enterprises would not receive long term orders in case the steel prices continue to go up.”An analyst of steel products disclosed that ”

On the contrary, the main driver behind the price rebound is the overall rallying down stream industries. The social inventory of steel products continues to scale down along with the improvements of the down stream consumption.

In short, there are more and more hardware enterprises noticing that the only way out for them is to enhance the technology-content of the products and develop their own advantages products.