Lower Demand, Prices Send China’s Steel Profits Tumbling 96%

China’s steel industry has seen its profits plummet by nearly 96 percent in the first half of the year, said a senior industry official on Tuesday, as demand for steel continues to shrink amid the global economic slowdown.

Zhang Changfu, the vice-chairman of the China Iron and Steel Association (CISA), had told reporters in Beijing that profit margins for Chinese steel companies had fallen to just 0.13 percent, compared to 3.06 percent a year ago; and that the total profits for the entire steel industry was now just at 2.39 billion yuan ($376 million).

China’s steel industry has seen its profits plummet by nearly 96 percent in the first half of the year, said a senior industry official on Tuesday, as demand for steel continues to shrink amid the global economic slowdown.

Zhang Changfu, the vice-chairman of the China Iron and Steel Association (CISA), had told reporters in Beijing that profit margins for Chinese steel companies had fallen to just 0.13 percent, compared to 3.06 percent a year ago; and that the total profits for the entire steel industry was now just at 2.39 billion yuan ($376 million).

Additionally, according to Zhang, some of China’s largest steel makers, including Maanshan Iron & Steel, the nation’s second largest, were now halting production at its plants in order to cope with weaker demand and lower prices for steel.

[quote]”The profitability of the industry is on the verge of becoming a deficit,” said Zhang, as quoted by the China Daily.[/quote]

“Production capacities are increasing in the current oversupply market while investment is growing, which will make the glut worse,” he added.

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In a report by the China Securities Journal, a state-run newspaper, the steel industry was also described as a “disaster zone”, with more than 80 percent of listed steel producers warning that their financial results would be worse than any previous forecast.

“The first half saw a big drop in investments for property and also in railways, cars and ships, so demand for steel has weakened,” said Zhang.

“Difficulties in steel exports to the EU may worsen in the second half due to the debt crisis,” he noted.

Li Xinchuang, the head of the China Metallurgical Industry Planning and Research Institute, told the China Daily on Tuesday that the Chinese government may consider restoring a value-added tax rebate on high-end steel products purchased from domestic steelmakers, so as to reinvigorate domestic demand.

While Chinese steel mills have been exporting steel at the highest level over the last two years, said Li, China still imported about 15 million metric tons of high-end steel products annually, which could potentially be produced by Chinese steelmakers instead.

[quote]”It (the tax rebate) will help increase domestic supplies and reduce imports if the new policy can be carried out,” Li said. “Chinese companies can provide 7 million to 8 million tons of steel products at the most to replace imports if the plan goes well.”[/quote]

Nevertheless, Han Weidong, a senior analyst at Lange Steel Information Research Centre, predicted that many smaller steelmakers might soon go bankrupt, “which will lead to a new balance” of production between the larger companies.

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Besides the steel industry, profits at other industries have also taken a hit this year, sparking fears of a hard landing for China. State-owned companies for instance, traditionally the giants of the Chinese economy, saw profits drop by 11.6 percent in the first six months of the year compared to the same period last year – the weakest performance by these companies since the global financial crisis erupted in late 2008.