Difficult decade ahead for domestic steelmakers

Against a backdrop of rising raw material costs and industrial oversupply, most steel mills across the nation will make losses or struggle to break even in the next five to 10 years, according to experts.

Driven by nationwide infrastructure construction, the capacity of China's steel industry surged by 400 million tons from 2004 to 2012. But as the nation's economy enters a steady growth stage, there are between 200 and 300 million tons of excess capacity at the moment, said Xu Kuangdi, president of the Chinese Society for Metals.

"Some observers said it is winter in the Chinese steel industry, but I don't see that spring will follow," said Xu at the Baosteel (Baoshan Iron and Steel) biennial academic conference that started on Tuesday, suggesting steel mills may have to suffer a longer period of hardship than expected.

"An industry reshuffle will take place and the consolidation period for the steel industry may last as long as 10 years," he said.

According to Xu, China produced 191.75 million tons of steel in the first quarter, with a record high growth rate of 9.1 percent year-on-year.

Xu Lejiang, chairman of Baosteel Group Corp, said the steel growth rate will slow down in the following two quarters. He said China's steel production grew 20 percent year-on-year from 2000 to 2006 but this declined to about 10 percent from 2006 to 2011, then dropped below 5 percent afterwards.

Some 716.54 million tons of crude steel was produced in 2012, a year-on-year growth of 3.1 percent, the National Bureau of Statistics said.

To keep competitiveness during an industrial downturn, Xu Kuangdi suggested that steelmakers streamline production capacity through mergers and restructurings, optimize production structure, pay attention to fine management, and improve customer service.

"Steel companies can borrow ideas from (online platforms) Alibaba and Taobao, which provide logistical services themselves, so as to retain an extra 2 to 3 percent profit," he said.

Baoshan Iron and Steel Co Ltd (Baosteel), the nation's largest listed steelmaker, launched an e-commerce platform on May 31 as part of efforts to diversify its business structure amid a sluggish market, said Xu Lejiang.

The platform, Shanghai Steel Trade Center, was co-founded by Baosteel and a company under the Baoshan district government. According to sources, it is designed to provide an all-round service, including steel trades, settlements, storage and logistics to steel enterprises, traders and downstream clients. Baosteel holds a 90 percent stake in the steel trade center.

"The Shanghai Steel Trade Center will contribute between 20 percent and 30 percent of its profits to Baosteel," Ma Guoqiang, the steelmaker's general manager, was quoted as saying by the National Business Daily in late April.

Major listed steelmakers posted worse-than-expected earnings in the first quarter due to surpluses, but Baosteel remained upbeat, with its net profit surging 33.3 percent to 1.6 billion yuan ($259.8 million).

The country's 80 major steel companies posted 1.58 billion yuan in profits in 2012, tumbling 98.2 percent year-on-year, according to data from the Ministry of Industry and Information Technology.

Their sales margin was a mere 0.04 percent in 2012. That figure used to be above 2 percent, and it was 8 percent in 2004.