Weak demand pummels steel companies' finances

Listed Chinese iron and steel companies reported wide-ranging losses in the first three quarters against the backdrop of sluggish demand and renminbi depreciation.

As of last Wednesday, five of the 11 listed iron and steel companies that had released the third-quarter financial results, reported collective net loss of 5.6 billion yuan ($881 million), compared with a collective net profit of 1.4 billion yuan during the same period last year.

Another six listed iron and steel companies have released forecasts, projecting losses from 4.5 billion yuan to 5.4 billion yuan.

Anshan Iron and Steel Group Corp, or Ansteel, has put its estimated losses in the first three quarters at 888 million yuan, compared with a profit of 923 million yuan in the same period last year.

Guangdong-based SGIS Songshan Co Ltd, in which Baosteel has a stake, suffered the biggest loss of 1.6 billion yuan.

Baosteel reported net profit of 2.25 billion yuan in the first three quarters, down 55 percent from the same period last year.

According to the statistics of the China Iron and Steel Association, its 150 member companies reported profits in the first half of 2015. Losses started in the third quarter and amounted to nearly 29.8 billion yuan.

Many companies attributed the losses to the usual suspects like domestic economic slowdown, yuan depreciation, overcapacity, fierce competition, and downward spiral of iron ore prices.

"The demand for iron and steel is falling but the output has not slowed accordingly," said Liu Xinwei, iron and steel analyst at SCI International, a commodity market information service provider in China.

"On the one hand, losses arose because State-owned enterprises have huge production capacity. On the other, existing bank loans prompted them to continue production in spite of the losses. The capital chain is tightening with growing risks of snapping," Liu said.

He said it is no longer sensible to believe demand will drive growth in the industry. China is transforming its growth model. So, macroeconomic policies are going to have a limited influence on keeping up demand. Steel companies have to curb production and move up the value chain, he said.

Amid the general gloom-and-doom scenario, special steel companies offer a silver lining.

Yongxing Special Stainless Steel Co Ltd that specializes in special stainless steel rods and wires for petrochemical and basic energy industries, has estimated its profits in the first three quarters to be in the range of 153 million yuan to 218 million yuan.

According to the World Steel Association, China's steel demand, which peaked in 2013, will fall this year due to slowdown in construction and manufacturing industries. The demand this year is estimated at 690 million tons, down 3.5 percent from the previous year.

China remains the world's largest iron and steel consumer this year, accounting for 45.6 percent of the global demand. The world's total demand is going to decrease by 1.7 percent at year end from the end of last year.