Overcapacity sends China's steel sector into loss

China's iron and steel industry reported a loss of 699 million yuan (about 113 million U.S. dollars) in June, the first monthly deficit that the overcapacity-troubled industry has seen this year.

For the first half, the profits of members of the China Iron and Steel Association (CISA) hit 2.27 billion yuan, with an average profit margin of 0.13 percent, the lowest among all industries, said the CISA on Wednesday.

Steel prices have been dropping since February. At the end of June, the price of steel products fell 6.45 percent compared with the beginning of this year, and down 14.7 percent year on year, according to the CISA.

Oversupply in the steel sector will continue amid the country's economic slowdown, the CISA warned, as the country has been pushing forward economic reforms.

China's economic growth slowed to 7.5 percent in the second quarter from 7.7 percent in the first three months, as the government deliberately tamed the pace to avoid bubbles.

The CISA once urged steel companies to rein in excess production before actual contracts and transactions, a call which was widely ignored by mills afraid to lose market share and loans, as well as bearing pressure from local governments.

China's output of pig iron, crude steel and steel products still expanded to 357.54 million tonnes, 389.87 million tonnes and 516.96 million tonnes in the first half, up 5.7 percent, 7.4 percent and 10.2 percent year on year, respectively, according to the CISA.

Moreover, the amount of steel being stored by CISA member mills increased 225,000 tonnes, up 1.75 percent year on year, which further lifted the business cost, the CISA said.

During the January-June period, CISA members saw their sales revenues reach about 1.8 trillion yuan, up 0.94 percent year on year. But 35 out of 86 CISA members reported losses, the association added.

The CISA said the association will cooperate with government departments to solve the overcapacity problem.

"No one wants to be the first to collapse," and said Li Xinchuang, deputy secretary general of the CISA, "but if the output can not be appropriately controlled, the mills with capital problems will fall into bankruptcy."

Analysts said that the steel sector has struggled for profit since late 2011, shrinking to 0.43 yuan for every tonne of steel by the end of last month.

Based on CISA data, the average debt-to-asset ratio of its members stood at 69.47 percent in the first half of 2013, 1.4 percentage points higher from a year earlier, with some even hitting 80 percent, posing a more serious situation of capital chain tension.

The less competitive upstream businesses in the Chinese steel sector worsened the plight, as the iron ore monopolized by foreign countries declined much slower than the domestic steel price.

In June, the iron ore price slightly dipped 0.3 percent from the beginning of 2013, equating to a drop of about 30 yuan per tonne, while the average steel price declined by about 280 yuan per tonne, according to the Ministry of Industry and Information Technology (MIIT).

Meanwhile, stricter energy saving and emission standards required some steel enterprises to invest more in reducing pollution. Of 20 cities suffering most from air pollution in China in 2013, steel was produced in 17 of them.

The MIIT confirmed that the ministry and the National Development and Reform Commission, China's top economic planner, are currently working on a plan to eliminate outdated production capacity in the steel industry.

To ease overcapacity in affected industries, the MIIT on July 25 ordered some 1,400 companies in 19 sectors, including steel, to eliminate outdated production capacity by September and eliminate excess capacity by the end of the year.