Chinese steel firms are taking a major hit due to a current flood in the market, yet local governments have been reluctant to take action despite slumping prices.
Domestic steel prices have been on the downturn since the beginning of the year, with the Platts China Steel Sentiment Index (CSSI), a gauge for steel prices, dropping to 38.09 points in October, far below the median level of 50, and 7.78 percentage points lower than September, making it the lowest of the year. Steel transaction prices tumbled to 3,212 yuan (US$524) per ton in the first half. The composite steel price index, compiled by China Iron and Steel, dipped to 90.63 points at the end of August, an 11-year low.
Zhang Lin, analyst at lgmi.com, a steel industry platform, blames the price slump on overstock and weak regulations, a result of the reckless expansion among steel firms during the heyday of the realty market, according to Chinese-language Securities Daily. As a result, a price war has erupted among domestic steel firms, with some firms likely to go under.
Total core-business profits of major and medium-sized steel enterprises reached only 1.93 billion yuan (US$315.1 million), out of total profits of 11.3 billion yuan (US$1.84 billion), in the first seven months this year, for a minuscule profit rate of 0.54%, the lowest among various industries. That figure represents a major improvement over the 3.17 billion yuan (US$517.5 million) made in 2013, according to the China Iron and Steel Association.
Despite the thin margins, steel companies have continued to keep producing, with the nation's raw-steel output rising 2.6% year-on-year to 550 million tons, steel-material output advancing 5.4% to 742 million tons, and raw-iron output inching up 0.5% to 483 million tons in the first eight months of the year.
"In this market, steel companies can't afford to cut their output, as competitors are looking for any sign of a potential buyout," remarks Zhang Lin.
In May, the Ministry of Industry and Information Technology (MIIT) put forth a goal to slash the nation's iron and steel refining capacity by 19 million tons and 28.7 million tons, respectively, in 2014. "Local governments may be reluctant to implement this policy as it will affect their tax revenue and performance record," one industry insider said.
"With steel companies being the mainstay of the industrial sector in many places, municipal governments are unlikely to overhaul their operations in order to avoid the effect on employment and social stability," said Shen Meng, a venture capitalist.
Some places even offer subsidies to steel companies under their jurisdiction to keep them afloat, Securities Daily said.
Source: Want China Times