China’s Private Steelmakers Are Now More Profitable Than State-Run Peers
The profitability of China’s privately-owned steel mills edged past that of their state-owned peers last year as greater flexibility in management allowed them to rein in production and turn to cheaper raw materials amid a rally in iron ore prices.
Profits of China’s major privately-owned steel mills rose 6.1% year-on-year to 161 billion yuan ($24.9 billion) in total in 2020, with an average operating margin of 4.8%, Wang Lianzhong, vice president of the China Chamber of Commerce for Metallurgical Enterprises (CCCME), said Tuesday. That outstripped the main state-owned steel mills, whose margins dipped to 4.41%, according to data from the China Iron and Steel Association.
The increase in profitability of private steel mills is the result of “actively adapting to market changes” and “proactively controlling production,” said Wang, who spoke at an industry conference.
Private steel enterprises like Jiangsu Shagang Group Co. Ltd. and Delong Iron & Steel Ltd. generally have more flexibility in terms of management and can adapt more quickly to market fluctuations compared with state-owned enterprises (SOEs), slashing production when needed. As spiking iron ore prices curbed profits, some private mills turned to importing steel billets, which are semi-finished products, whose price fell in overseas market in mid-2020 due to sluggish demand, said Wang.
“SOEs often have other larger social responsibilities than private ones, which can divert or slow down production if there are losses,” Cao Nanxin, an analyst at Albright Stonebridge Group, told Caixin, adding that SOEs don’t enjoy such latitude. SOEs also need to more strictly follow environmental standards, which adds to their costs, she said.
As prices of billets slumped below $400 per ton while domestic prices stood between $450 and $500 from March to July last year, China’s steel mills placed large orders with producers in countries like India, according to industry consultancy Mysteel. Prices of iron ore — a major raw material input for steelmaking — saw a 7.2% year-on-year increase in the country’s average import price to $101.7 per ton.
The buying spree pushed China’s imports of steel billets to jump more than fivefold from levels in 2019 to 18.67 million tons, according to customs data. In contrast, the growth rate of steel output by private steel mills nearly halved in 2020 to 5.98% from 9.7% in 2019, according to the CCCME.
Overall, China’s crude steel production rose 5.2% year-on-year in 2020 to top 1 billion tons, marking the fifth consecutive year of increase, data from the National Bureau of Statistics shows.
China churned out 56.5% of the world’s crude steel production last year, maintaining its position as the biggest producer, according to the World Steel Association. However, output is no longer the most important consideration, and instead quality and low-carbon emissions, smart manufacturing and innovative development are preeminent factors, said Wang.
Wang Libin, spokesman for the Ministry of Industry and Information Technology, said in a briefing on Jan. 26 that the authority will establish mechanisms including curbing carbon emissions and electricity usage to ensure China produces less steel this year than in 2020.
Flynn Murphy contributed to the story.
Contact reporter Lu Yutong (firstname.lastname@example.org)
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