China Steel Profits Will Go Downhill

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Low demand and higher costs are expected to further erode profits in the Chinese steel sector in 2012, China industry ministry spokesman Zhu Hongren said on Tuesday.

He said many big steel enterprises suffered losses in the second half of last year, and the situation was unlikely to improve in 2012.

'In 2012 the steel industry will face an even more severe test -- on the one hand, weak demand will make the supply-demand gap even wider, and on the other hand, high prices of raw materials like iron ore will continue to put pressure on profits,' Zhu said at a briefing in Beijing.

Daily crude steel output remained at more than 1.9-million tons a day for much of last year, with the sector buoyed by high housing and construction demand, but it plummeted to around 1.7-million tons in the last quarter as Beijing sought to rein in a speculative commercial real estate boom.

Daily crude steel output slipped 1.3 percent in mid-January to 1.669-million tons, the latest data available from the China Iron and Steel Association showed, and analysts have said that production cuts are likely in the coming months if margins do not improve.

Zhu said there were grounds for optimism, saying that the risks could create the opportunity to restructure the sector and eliminate excess and outdated production capacity.

Steel consultancy MEPS said in a note issued on Monday that 'some sort of collapse is clearly on the cards' but said that the speculative real estate boom had actually suppressed real demand for housing in China.

'As this bubble bursts, the Chinese steel industry can look forward to several more years of record output, as developers step back and begin supplying the country with the affordable homes it desperately needs,' said Rafael Halpin, China analyst with MEPS.

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