Baoshan Steel Warns of Tougher Fourth Quarter After Profit Surge

Fresh from reporting a doubling in profit, Baoshan Iron & Steel Co. (600019), China’s biggest publicly-traded steelmaker, cautioned of a tougher quarter ahead, reflecting the challenges facing an industry beset by overcapacity, a slowing domestic market and simmering trade tensions.

Baoshan cut prices for this month and next, which will hurt profit margins in the fourth quarter, Zhu Kebing, chief financial officer of the Shanghai-based company, said in an online briefing today. The company yesterday reported its highest profit in five quarters following a decline in raw material costs.

The price cuts reflect the impact of the cooling Chinese real estate market and overproduction in the industry. While export markets have provided relief, China’s trade partners have begun complaining. Steel demand in China will stay at low levels as pressure on the economy persists, Baoshan said yesterday in its earnings statement.

Iron ore prices, which according to Baoshan’s calculations tumbled 41 percent in the third quarter, have shown signs of stabilizing. Ore with 62 percent content delivered to Qingdao added 0.9 percent to $79.82 a ton yesterday, according to data from Metal Bulletin Ltd. The price has gained 2.3 percent so far since Sept. 30.

Baoshan Steel yesterday joined Angang Steel Co. and Hebei Iron & Steel Co. in reporting a surge in profit after raw material costs fell faster than steel prices.

Iron ore may hover around $80 to $90 in future, Dai Zhihao, general manager of Baoshan, said at the briefing. Baoshan’s investment in iron ore mines would maintain good returns at current prices, he said.

China’s economy in the third quarter grew at its slowest pace since the first quarter of 2009, providing the latest indication of weakening steel demand at home and more reason to look to overseas markets.

China’s steel-product exports surged 73 percent to 8.52 million tons in September from a year ago, taking this year’s shipment to a total of 65.4 million tons.

A boost in China’s steel exports has raised speculation that the government may cancel or cut tax rebates that some exporters are currently enjoying, Chen Derong, newly-elected chairman of Baoshan Steel, said at today’s briefing.

“If the policy is really imposed, it will increase exporters’ costs and have a big impact on the overseas steel sales,” Chen said. “Our company will also be affected.”

China gives rebates on shipments of some cold-rolled products and so-called steel alloys, which contain other metals and materials such as boron, according to Hu Yanping, a Beijing-based analyst with researcher Custeel.com. Many mills are able to receive refunds by adding boron into their products, she said.

“To Baoshan, the impact could be very limited,” Hu said. “Baoshan’s cold-rolled products are regarded as high value-added so they’re unlikely to be targeted under the government’s move to curtail exports.”




 

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