TANGSHAN SHENHENG STEEL

China steel sector’s 1H 2018 profits post gains

publisher: Joey Gao
Time: 2018-08-02

China’s steel sector profits more than doubled from a year earlier during January-June, with outlooks pointing to similar firm gains in the second half of the year as well.

January-June profits were 187.5bn yuan ($27.52bn) on revenues of Yn3.19 trillion that grew by 15.4pc from the previous year, according to China’s national bureau of statistics. But June profit fell back by 16pc to Yn34.92bn from Yn41.55bn in May.

Steel profits have been driven higher since late April on robust demand for construction steel products and environmental restrictions on steel production. Profits have remained stable since last month at around Yn1,000/t on average.

A meeting of China communist party’s politburo, presided by President Xi Jinping, yesterday announced the country will continue to follow proactive fiscal and prudent monetary policies to ensure sufficient liquidity for the economy and strengthen infrastructure building in this year’s second half. Infrastructure sector growth has slowed to 7.3pc in the first half of the year compared with 19pc growth last year. Steps to revitalise the sector will add to steel demand.

But steel demand and profitability could be affected if Beijing follows through with the politburo’s decision to “resolutely curb rise in home prices”. Real estate investment has grown by 9.7pc in the first half of the year, leading to acceleration in new project start-ups and land acquisitions.

Most of the steel price gains this year have been because of higher demand from real estate projects. As more of the new projects enter their construction phase during rest of the year, construction steel sales could accelerate, especially in the seasonal peak sales months of September and October.

Beijing’s efforts to cool the property market since late last year has slowed price gains in 15 largest markets but prices are increasing in second- and third-tier cities. If Beijing turns to curbing gains in these markets as well, it could slow investment growth and affect steel market sentiment.

Steel profitability could also be supported by continued environmental restrictions on steel production. Such restrictions are in force in the cities of Tangshan, Xuzhou, Handan, Xingtai, Wu’an and Changzhou. Total steel capacity taken out by the cuts in thes first four cities are around 20.57mn t, according to investment bank Goldman Sachs. China’s winter output cuts are poised to be rolled out in up to 80 cities during November-March compared with 28 cities last year.

Construction steel demand usually slows in winter but still remains active enough for demand to easily outstrip the expected sharp fall in supplies during the winter months. Steel supplies last year did not fall in winter as mills stocked up on crude steel in advance, while using more scrap in the basic oxygen furnace to compensate for lower pig iron output in the blast furnace. South China steel mills, such as those in Jiangsu province, increased output. But Jiangsu is to face production cuts this winter, along with fellow steel producing provinces Shandong and Hebei in north China.

Mills’ profits are also to get support from a slower increase in raw material costs, as iron ore prices are unlikely to spike sharply in the short term. While mills’ profitability doubled in this year’s first half, operating costs increased by 12.5pc as iron ore prices have been largely stable in a $63-69/dry metric tonne range since late March.

Portside iron ore stocks are currently high, so steel mills are mostly buying based on immediate demand. Scrap is being increasingly used to substitute iron ore to save costs and to meet environmental regulations. The depreciation of the yuan against the US dollar has also soured iron ore fundamentals, said an analyst report by China Investment Futures.

Profit margins could face some pressure from higher environmental protection costs, which Goldman Sachs forecasts could hit $30-40/t in the short term as mills race to comply with ultra-low emissions regulations. These will be made compulsory in Hebei province this year and the rest of China over the next several months. Environmental costs were $23/t in 2017.

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