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China's Steel Companies Slumped in H1 with Profit Margin at 0.13Pct

08-01 15:47 Caijing
The industry ministry will again single out some companies, ordering them to cut excess production capacity. The list will come out within the year.

Chinese steel companies, suffering from chronic overcapacity, have reported expanded losses and shrinking profit margins in the first half of the year, adding to the difficulty for the new leadership to turn around the industry.

35 of 86 member companies of the China Iron & Steel Association (CISA), or over 40 percent, are running in the red, according to the CISA data released yesterday.

The key of the long-awaited restructuring of the industry, in the "hard winter", is to throttle back on production and reconcile supply and demand, said Zhang Changfu, Secretary General of the CISA.

Authorities, including the country's top economic planner and the price watchdog, are working on a solution to the "severe overcapacity problem" in the steel industry. A plan is in place and is expected to be published soon, Zhang added.

Profit-per-ton at CNY0.43

Aggregate profit of the 86 CLSA member companies was 2.3 billion yuan ($375 million) in the first six months, with a sales margin at only 0.13 percent, the CLSA said.

In June only, those companies posted a combined loss of 699 million yuan, representing the first monthly loss so far this year, it added.

The situation is equally dire for listed companies. Xinxing Ductile Iron Pipes (000778:Shenzhen) announced last week that its operating profit was down 47.81 percent from a year earlier despite a year-on-year gain of 7.47 percent in operating revenue. It attributed the decline to weak demand and lower prices.

Hangzhou Iron & Steel Co (600126:Shanghai) expected it could lose around 72 million yuan in net profit in the period, while Hunan Valin Steel Co Ltd (000932:Shenzhen) revised up its forecast for losses to 393 million yuan.

Chinese steel makers have been struggling to break even since the next half in 2011, the state-run Xinhua said. Deducting revenue from mining rights and investment, the steel industry as a whole has posted a loss for seven quarters.

Profit-per-ton slumped further to 0.43 yuan in the first half, Xinhua said, comparing it to the price of an ice lolly sold at at least 1 yuan each.

High leverage

Accompanied with the near-zero profit margin are high debt ratios for most steel makers in China. CLSA data showed that 86 steel makers in the first five months had over 3 trillion yuan of liabilities, with an average debt ratio of 69.5 percent. Among listed companies, a total of 18 companies reported a debt ratio of over 70 percent in the first quarter, with the average at 84.4 percent.

With tight money condition and extra high credit cost, these companies are unwilling to cut production even though most of them have excessive capabilities, said Qiu Yuecheng, an analyst with 96369.net, an online steel trading platform.

The companies have to sustain production to scoop up even a small profit to repay banks, adding to risks in the capital chains, Qiu added.

Policy underway

Plans to "resolve severe oversupply" in industries including steel are expected to be announced as soon as in the next half this year, according to Zhang. The new policies will make it harder for companies in industries with excess capacity to obtain land, funding or environmental certifications, Zhang said.

The Ministry of Industry of Information Technology will also publish a new list of companies, which it deems overcapacity, within the year. Last week, the industry ministry issued orders to more than 1,400 companies in 19 basic industries including steel, cooper and cement to cut excess production capacity-with plants idle by September, and closed down for good by the end of the year.

 

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