2012-03-18

Chinese steel makers in bad shape

You only need to read the headline to understand the mood in the steel sector: Sad Industry Mantra: Make Steel, Lose Money
The industry's tale of woe has been punctuated by financial reports from companies such as publicly listed Guangzhou Iron and Steel Enterprises Group, which said it lost 689 million yuan last year and nearly 98 million yuan in 2010.

Even the state-owned sector is struggling to make money. The country's largest steelworks Baosteel Group Corp., for example, said 2011 profits slid 21 percent year-on-year to 18.7 billion yuan.

And Shagang Group, a private steelmaker in Jiangsu Province, said last year's revenues fell 30 percent from 2010 to 207 billion yuan.

"No matter how we control costs, we can't stop the profit margin from declining," a Shagang manager told Caixin. "We've adjusted the product mix, expanded new product development and market expansion.

"Sales revenues increased, but profits slid anyway," he said. "This points to a problem: The entire industry has reached an operational state marked by high production capacity, high costs, and low economic benefit."
Steelmakers are responding by branching out of the steel industry:
Large and medium-sized steel companies owned by the state have a hard time suspending or reducing production even when they're not making money because shutting down blast furnaces is costly and they are obligated to maintain employment levels, Liu said.

"Money-losing companies drag down average profit margins, and steel prices are pushed down when more products from money-losing companies are put to market, making it difficult for industry profits to rise," he said.

Some have opted to expand into energy ventures. On February 22, for example, Wuhan Iron and Steel Group (Wugang) in Hubei Province and China Resources Steel Trade Co. Ltd. formed a 50-50 joint venture natural gas business.

"The gas company will become a new profit point for the company," a Wugang executive said. "We initially expect annual profit contributions of around 700 million yuan."
Or pig farming. Thanks to cheap capital, state owned steel makers can venture into other business areas, but what about private firms? Lucky for the listed firms, the stock market in China is not fully developed yet, otherwise their stocks would be hammered after they announced business ventures with no relation to their core business or expertise. Finally, if overcapacity in steel is a problem, what are the odds that they will create overcapacity in the sectors they enter? The economically healthy course is for weak firms to enter the steel market, not to have weak firms expand into natural gas, real estate and pig farming.

No comments:

Post a Comment