According to Liu Zhenjiang, secretary of the Party Committee of Chinese Iron and Steel Association (CISA), the members of the association suffered a monthly loss of more than RMB10 billion last year, and the accumulated deficits of the major business were over RMB100 billion, that is 24 times more than that of last year.

Statistics published by CISA two months ago showed that members of the association lost RMB64.534 billion. And Liu explained that it was the result that included investment income and some other programs. In 2014, the total profit of Association’s member enterprises was RMB 22.589 billion. And then the major business of the steel enterprises went through deficit of 12 consecutive months. Since July 2015, they have entered the situation of “heavy losses”.

 “Poor economic performance directly related to the severe overcapacity,” according to Liu, supply excess began from 2006. From 2006 to 2007, China increased steel production by 60 million tonnes each year, however, due to the huge pricing discrepancy between domestic and abroad market, the export volume increased 20 to 30 million tonnes each year accordingly. In this way, even though there’s overcapacity, enterprise revenue was still in good condition.

In the past a few years, although the steel outputs have always been in the overproduction, the demand had kept positive growth each year only till 2013 when it reached to the peak of 765 million tonnes. As for the present situation, the export volume also reached its peak, and it is very likely that the export will decline this year.

According to Liu, the profit ratio of sales of major business in steel industry was -2.23%. “Many enterprises depend on the means of depreciation. Depreciation ratio of steel business in the member enterprises has decreased from 9.31% in 2004 to 4.78% in 2015. And if the depreciation ratio stayed the same, profit ratio of sales would have reduced to zero since 2008.”

Steel price plunged, which was another major reason for the losses of steel enterprises. According to CISA, domestic steel price index in China has declined since the third quarter of 2011, and up till to the end of last year, it decreased by 55.61% in general, that was RMB2600 per tonne. Take the year of 2015 as example, the steel price has fallen by RMB1300 per tonne on year-on-year basis. The present steel price is only the half of that was in 1994, while the production cost has been all the way going upward.

One of the major reasons for the extremely low steel price is the market environment that lack of justice and regulation. According to Liu, domestic enterprises have been involved in vicious competitions where market players competing markets through all kind of means to force price down, and thus we can explain why there are so many counterfeit and shoddy products among the market and we could also get to know why the enterprises tend not to make out the receipt. They competed with each other on the basis of the existing unfair taxes and dues.”

“This round of vicious competition has turned from ‘sales first’ to ‘not dare to bear the losses,” said Liu, “the reason for this transformation is that the companies can’t afford the loss as they used to.”

However, domestic steel price were back to upward tendency in the first quarter of 2016, and many steel enterprises began to make profit again. According to CUsteel, a portal of steel in China,  the price of screw-thread steel has increased by at least RMB400 per tonne compared with that of the end of February, and the production profit has broke through RMB200 per tonne.

Although according to general feedback the recovery of steel price brought better profits to steel enterprises than the fourth quarter of last year, it still couldn’t compete with that of the H1 of 2015 as the price of this year was lower on year-on-year basis. For example, the price of January was RMB500 lower per tonne year on year, that in February was RMB400 lower, and that in March was RMB300 lower.

During the first quarter of 2016, some enterprises began to reduce losses, among which some began to operate with flat, and others began to make profits. The scale of losses was reduced, but the situation of industry-wide losses has not been changed yet. According to CISA, the major business of iron and steel industry in China were still in the loss of RMB11.4 billion during the period of January to February of 2016.

Some enterprises that had been forced to reduce production because of operational difficulties recovered their production. According to CUsteel, there have been 60 blast furnaces with total holding capacity of 45,930 cubic meters all across the country since Spring Festival, among which 46 furnaces of total capacity of 35,530 cubic meters re-operated in March. As a result, the daily production of domestic crude steel increased to 2.164 million tons in the middle March, increased by 4.3% on a ten-day basis.

The pre-loss of JISCO Hongxing last year was RMB6.96 billion, while the pre-loss in the first quarter this year was RMB270 million. The ZYSCO, who lost profits in two consecutive losses, also suffered a pre-loss of RMB20 million to RMB25 million. Huzhou Yongxing were in the pre-profit of RMB46 million to RMB57 million.

This year is the so-called Year of Decisive Battle for steel enterprises to turn from deficit to profits. According to Liu, it is of prime importance to control production as long as there are excess capacities in the industry, otherwise, the situation of severe oversupply and the mess of steel market would be hard to change, and therefore steel enterprises would keep losing.

*This article is an edited and translated version by CCM. The original article comes from Jiemian.com.

You could visit CCM PESPESTIVE for more information about China.

About CCM:

CCM is the leading market intelligence provider for China’s agriculture, chemicals, food & ingredients and life science markets. Founded in 2001, CCM offers a range of data and content solutions, from price and trade data to industry newsletters and customized market research reports. Our clients include Monsanto, DuPont, Shell, Bayer, and Syngenta.

For more information about CCM, please visit www.cnchemicals.com or get in touch with us directly by emailing econtact@cnchemicals.com or calling +86-20-37616606.

Subscribe to our Newsletter