Steel companies facing difficulties: S&P

Weak margins and overcapacity will erode the profitability of China's steel sector this year, amid sluggish demand and declining prices, ratings agency Standard & Poor's said at a teleconference Wednesday.

"The overall performance for this year is expected to be much weaker than last year," Suzanne Smith, a credit analyst at Standard & Poor's, told the Global Times at the teleconference. But the industry is not expected to record a loss for the year, Smith said.

China's 80 largest steel makers suffered a total loss of 1.98 billion yuan ($312 million) in July, China Business News reported Wednesday citing data from the China Iron and Steel Association (CISA). The firms made a meager profit of 710 million yuan for the first seven months, down 98.9 percent from a year ago, said the report.

The major companies made a combined profit of 87.5 billion yuan in 2011, according to the CISA.

Prices of major steel products have fallen back to the same level as in April 2009, having been sliding since August last year, Xu Xiangchun, information director with mysteel.net, a steel information provider, told the Global Times.

Slowing demand and overcapacity is likely to keep steel prices at a low level and could easily depress them further, according to S&P's report.

Demand growth has decelerated due to a slowdown in residential and commercial real estate construction, which accounts for half of steel demand, S&P said.

With Europe's recession and the weak US recovery, global companies in the industry are all hurting this year, Smith said. S&P has also lowered its ratings for Arcelor Mittal, the world's largest steel company, and other major steel makers including Nippon Steel and Posco.

"The steel industry in China might be worse off than elsewhere because of the overcapacity situation. A number of steel manufacturers have been shut down in Europe, but we have not seen that happen very much in China," Smith said.

"While reliable estimates of overcapacity are difficult to obtain, we estimate the level to be about 10 to 25 percent," S&P said in the report.

China's crude steel output reached 730 million tons in 2011, higher than the official figure of 683 million tons, because Hebei Province, China's leading province in terms of crude steel production, concealed its actual output, the 21st Century Business Herald reported Wednesday citing Wu Xichun, a former official with the CISA.

Hebei deliberately gave a smaller output figure because of its fear that excessive output might draw the central government's attention and lead to tougher rules, Xu said.