Caixin
Nov 05, 2020 07:11 PM
BUSINESS & TECH

Recovering Demand Leaves China’s Steelmakers Rolling in Profits

The strong third quarter marked a sharp improvement from the first half of the year when construction and manufacturing activity slowed during the height of China’s Covid-19 outbreak.
The strong third quarter marked a sharp improvement from the first half of the year when construction and manufacturing activity slowed during the height of China’s Covid-19 outbreak.

China’s steelmakers posted strong third-quarter profit growth, thanks to accelerating spending from big buyers like infrastructure builders and carmakers as China’s economy rebounded from its Covid-19 outbreak early in the year.

Following the exceptionally strong quarter, the China Iron and Steel Industry Association said it expects the sector’s annual profit for 2020 to be flat to down slightly compared with 2019 — a major improvement over the first half of the year when profits fell sharply.

The industry’s publicly listed companies posted third-quarter profits that were up anywhere from 40% to 200% year-on-year, according to Caixin’s calculations using company data. Put differently, profits from the three-month period accounted for anywhere from 40% to 60% of companies’ total profits in the first nine months of the year.

A case in point was the nation’s largest listed steelmaker Baoshan Iron and Steel Co. Ltd., whose third-quarter profit rose 44% to 3.86 billion yuan ($581 million), equaling about half of its profit for the first nine months of this year.

The strong third quarter marked a sharp improvement from the first half of the year when construction and manufacturing activity slowed during the height of China’s Covid-19 outbreak. The country has typically turned to infrastructure spending to stimulate the economy during times of economic stress, which has likely helped improve performance in recent months.

Steel chart-1

The improvement was all the more impressive against a backdrop of weakness in steel prices and rising iron ore prices — two factors that would typically pressure profits. A market-tracking index showed that steel prices fell about 5.7% in the first nine months of the year versus the same period of 2019, according to the Ministry of Industry and Information Technology (MIIT). Over the same period, separate data showed imported iron ore averaged about $99.97 per ton, up 5.6% year-on-year.

Despite those pricing trends, strong domestic demand helped to lift crude steel output 10.3% in the third quarter, marking a sharp acceleration from growth in the 1% to 2% range in the first half of the year, according to data from China’s National Bureau of Statistics (NBS).

Profits for the industry’s largest players fell 36.4% in the first half of the year to a combined 68.7 billion yuan, steel association data showed. But as demand picked up in the second half of the year, profits grew 30% or more in the third quarter, NBS data showed.

As the situation firmed and improved, the industry reported four consecutive months of profit gains year-on-year between June and September, the association said. Baoshan cited strongly rebounding demand from supply chains feeding into the car, home appliance and engineering machinery industries.

But the poor first half for most companies meant that of 32 listed companies, 19 posted overall profit declines in the first nine months of the year versus a year earlier. Twelve saw their profits grow, while the last one returned to profitability after posting a loss in the year-ago period. With demand expected to pull back towards the end of the year and prices set to remain relatively stable, the Iron and Steel Industry Association expects profits for all of 2020 to be flat to down slightly.

Contact reporter Yang Ge (geyang@caixin.com) and editor Joshua Dummer (joshuadummer@caixin.com)

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