Baosteel reports huge drop in profit

Baoshan Iron & Steel Co (Baosteel). a major steel maker in China, reported 61.47 percent year-on-year slump in its first-half net profit over the weekend, mainly due to sluggish market conditions.

Baosteel recorded 3.7 billion yuan ($604.58 million) in net profit in the first half of the year on the revenue of 91.6 billion yuan, which was also down 1.84 percent year-on-year, the Shanghai-based company said in a filing posted on the Shanghai Stock Exchange Saturday.

The company attributed its falling profit to growing steel supply during the January-June period. Among 86 large domestic steel companies monitored by the China Iron and Steel Association (CISA). 35 recorded losses in the first six months.

The steel makers' business in the first half was hurt by declining steel prices amid rising production and stagnant steel demand, Qu Xiuli, deputy secretary-general at the CISA, told the Global Times Sunday.

Also on Saturday, Baosteel separately announced a plan to make another 12 billion yuan of investment in its steel project in Zhanjiang, South China's Guangdong Province, fueling concerns over a possible increase in the overcapacity in the sector.

The 10-million-ton steel project, which started construction in May and is expected to begin operation in September 2016, is not far from Wuhan Iron and Steel Group's 10-million-ton high-end steel mill in Fangchenggang port, South China's Guangxi Zhuang Autonomous Region, which is also expected to begin operation in 2016.

Despite risks of competing with each other, the two mills that are designed to produce high-end products are in line with the country's measures to remove outdated capacity and promote industrial upgrade, Wang Guoqing, a senior analyst with Beijing Lange Steel Information Research Center, told the Global Times Sunday.

Overcapacity is a serious problem in China's steel industry, with only 73.4 percent of capacity in the sector being used in 2012, according to the CISA.

The Ministry of Industry and Information Technology (MIIT) released in July the first list of enterprises whose capacity should be removed, including 24 steel producers, and said it will announce another two lists later this year, with the aim to remove 6.98 million tons of steel production capacity in 2013.

In addition, the MIIT and the National Development and Reform Commission will soon release a scheme to address overcapacity in sectors including steel, the Economic Information Daily reported Tuesday, citing an official with the MIIT as saying.

The scheme will raise the environmental and technological requirements for these sectors, the report said.

Steel companies are reluctant to exit the sector because of heavy investment, and some local governments, which are still in pursuit of high GDP growth, tax revenue and employment, are also unwilling to reduce local steel production, Qu said, noting that the government moves will help ease the supply glut in the sector, as long as the local governments take real actions to curb capacity.

"The market tools are more important, as exit of loss-making companies due to intense competition will ease the troubles of the sector," she said.

China approved construction of railway projects and renovation of shabby residential areas in July, so the steel consumption is expected to see mild growth in the second half, Wang from Lange Steel said.