Chinese steelmakers continue to rack up massive losses

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Large and medium-sized Chinese steel mills suffered huge losses in the first 10 months of 2015 as weakening demand, overcapacity and lower steel prices wreaked havoc on the sector.

According to China’s state-run news agency Xinhua, citing data from the China Iron and Steel Association (CISA), losses at large and medium-sized steelmakers ballooned to 72 billion yuan ($11.34 billion) in the 10 months to October as the average sales margin of the 101 firms tracked by CISA contracted by 1.5%, the largest seen this year.

“Slowing investment in the property and infrastructure development, as well as weakening manufacturing, have dragged down domestic demand for steel, which in turn reduced profit for steel makers and forced small players to exit the market,” said CISA in a note released over the weekend.

Suggesting that weakness in steel prices, hence profitability, is almost entirely due to poor domestic demand, the losses came despite a separate report from China’s National Development and Reform Commission (NDRC) which revealed Chinese crude steel production dropped 2.2% to 675.1 million tonnes in the ten months to October compared to a year earlier.

Essentially, despite falling Chinese steel production, demand is weakening at a faster pace, leading to pressure on prices and profitability as a consequence.

That certainly fits with the latest Steel industry PMI report for November released last week which revealed activity levels across China’s steel industry collapsed over the month. The gauge plummeted 5.2 points to 37.0, well below the 50 level that separates expansion from contraction, with all survey components – particularly for new orders – deteriorating sharply.

Amidst crippling overcapacity and weakening demand for steel product, Chinese premier Li Keqiang pledged last week to cut back on overcapacity in traditional industries, singling out the nation’s struggling steel and coal sectors as areas of particular concern.

According to the state-run People’s Daily newspaper, China is currently producing 800 million tonnes of steel a year, four times greater than the annual amount any nation has ever produced, of which around half is deemed to be excess capacity.

In the absence of an unlikely recovery in Chinese steel demand, profitability will continue to suffer as long as excess capacity in the sector is maintained.