In 2018, steel prices jumped to a high point in
China, which promoted steel sales performance for many steel mills in
China. In the first half of this year, however, the financial performance
for steel mills in China overall was not that good from the reports
released by some China’s steel mills on August 22, 2019. According to
the reports, the average net profits in steelmaking fell by around 40%
year-on-year because of the increasing price of raw materials in
steelmaking, slack demands for steel in downstream industries, strict
production limitations for environmental protection and trade frictions
between China and the United States.
Profits
of Steelmaking for China’s Steel Mills Declined in 2019 H1
On the evening of August 22, 2019, many steel
enterprises in China announced their 2019 H1 production and financial
reports. Baosteel, leading steel enterprise in China, announced that the
operational income in 2019 H1 was 140.876 billion yuan, down 5.16%
year-on-year; the net profits was 6.187 billion yuan, down 38.19%
year-on-year; the net cash flow from operational activities was 9.437
billion yuan, down 51.53 year-on-year. In addition, other steelmakers in
China like Shandong Steel, XinJiang Ba Yi Iron & Steel, and Hangzhou
Iron & Steel Group also announced that the financial performance
declined compared with 2018 H1.
Increasing
Cost Pressures on Purchasing Iron Ore in Steelmaking in 2019 H1
According the statistics from China’s National
Bureau of Statistics, the profit of ferrous metal for smelting industry
and rolling processing industry totaled at 143.49 billion yuan in China
from Jan. to Jun., 2019, a year-on-year decrease of 21.8%, which was
reckoned as the main reason for the increase in revenues of several steel
companies but the decline in net profit. In addition, in the upstream of
steelmaking industry, the price of iron ore and coking coal rose rapidly,
which brought the higher operational costs in steelmaking for the
companies. Taking Shandong Steel as an example, the sales gross profit
margin and net profit margin fell to 5.51% and 1.16% respectively in 2019
Q1, since the price of steel fell and the price of iron ore rocketed
during these periods.
Forecast:
the Steel Industry in China may Recover in the Second Half of 2019
Since the beginning of July, iron ore futures prices
have shown a downward trend. As of August 22, the iron ore futures index
fell by nearly 30% during a month, falling to 600 yuan/t.
In addition, coking coal futures prices continued to
rise since 2016. Although the 2001 contract price of coking coal remained
at a high level in 2019 H1, it has also shown a downward trend since
August.
The senior analyst of SDIC Anxin Futures said that
the iron ore market itself has little contradiction in its fundamentals,
which is mainly affected by the price trend of black commodities such as
finished products and other raw materials. It is expected that the iron ore market in China may
run with fluctuations in the near term.
Baosteel considered that due to the equipment
maintenances in advance this year, the steel supply in 2019 Q4 is expected
to increase slightly year-on-year, but demands for steel on the downstream
market may remain unchanged, which appears an unbalance market between
supply and demand sides. Therefore, the continuous price rising in iron
ore will be limited, and the price of iron ore may fluctuate sharply
during the second of 2019.
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