By Jin Jing (China Daily)
Updated: 2008-03-28 09:16

Shares of Baosteel plunged 8.99 percent yesterday, after it posted a drop in net profit growth of 2.74 percent for 2007.

The company's net profit in 2007 was 12.72 billion yuan ($1.81 billion). Its earnings per share were 0.73 yuan, down 2.67 percent from 2006, according to Baosteel's statement to the Shanghai Stock Exchange yesterday.

Meanwhile, the company's sales jumped 5.6 percent to 22.6 million tons because of the growing production capacity and rising steel prices.

Analysts attributed the profit downturn to the poor performance of stainless steel products and special steel, and the higher-than-expected increase in raw material costs.

Zhou Tao, an analyst at Sinolink Securities, said Baosteel may have suffered a loss of another 600 million yuan on stainless steel in the fourth quarter of last year, following a 1.6 billion yuan loss in the third quarter that it had already announced in an earlier statement.

Baosteel said in the statement that the large price fluctuation in nickel, the raw material for stainless steel, was the main reason for the loss. "Baosteel's technology in stainless steel production needs an upgrade," said Zhou.

In addition, the gross profit margin of special steel dropped 1.85 percent in 2007, while in 2006, it rose 7.78 percent.

Analysts said the profit growth of Baosteel plain carbon steel is expected to be sound in 2008 because Baosteel raised steel product prices by up to 20 percent for the second quarter, which will fully cover the 65 percent increase in iron ore prices and sea transportation fees.

Last week, Baosteel announced it was raising plain carbon steel prices by another 300 yuan or so per ton for May this year.

"Bigger steelmakers can easily maintain their margins by raising prices while small and medium-sized companies will see their profits drop steeply," said Yang Baofeng, an analyst at Orient Securities.

Zhang Shengwu, an analyst at TX Investment Consulting Co Ltd, said Baosteel's cost controls are effective enough to ensure its continued growth in the future, as all the company's iron ore supplies are locked by long-term contracts.

Last Monday, Baosteel won the government's approval for the first phase of a large steel production base in Zhanjiang in Guangdong province whose capacity is expected to be over 10 million tons annually after initial investment.

Baosteel will also acquire Shaoguan Iron & Steel Group and Guangzhou Iron & Steel Group, and restructure them into a new holding company based in Guangzhou, according to the National Development and Reform Commission, the country's top planner.