Overcapacity, slowdown bring steel industry losses

Overcapacity, excess supply and sagging prices have taken Chinese steel companies from profit to loss in the first quarter, and the problems are set to get worse.

More than 45 percent of steel companies reported losses as growth hit an 18th month low of 7.4 percent.

Total losses stood at 2.33 billion yuan ($380 million) against almost 8 billion yuan of profits in the same period last year, according to Monday's report by the China Iron and Steel Association (CISA).

"The first quarter of 2014 was the most difficult quarter since the start of the century," said CISA vice president Zhang Changfu at a press conference in Beijing. Seasonally low consumption means steel firms find themselves in the doldrums.

At the end of March, inventories amounted to 19.4 million tonnes, over 43.5 percent up on the start of the year, intensifying worries. Prices have flagged.

The China Steel Price Index stood at 94.83 at end of March, down 11.28 percent year on year, and 1.7 percent from a month ago. The average transaction price fell 10.14 percent year on year.

Despite weak demand, output kept rising, though less quickly than a year ago. Crude steel output in the first quarter stood at 203 million tonnes, up 2.4 percent; output rose 5.3 percent to 2611 million tonnes. Total sales revenues stood at 869 billion yuan, down 0.79 percent year on year.

According to a government work report in March, 27 million tonnes of production capacity must be cut in the sector this year, but things have not gone entirely to plan. The government placed strict controls on new steel production last year, but new projects are still carried out.

"And this is worrying," Zhang said.

Inventory growth was also fueled by private investment. Private fix-asset investment totalled 71.6 billion yuan in the first quarter, up 6.65 percent year on year. Capacity increased by 90 million tonnes in 2012 and 40 million tonnes in 2013. Despite the reduction, investment remains high.

Government data shows the top 10 steel firms only producing around 40 percent of the nation's crude steel, and the proportion is declining. Mergers and acquisitions among steel firms are badly needed to both improve competence and manage output.

"To break the vicious circle, firms must turn their attention to product quality and categories, with a view to low carbon, environmentally friendly products," said Zhang Lin, a researcher at lgmi.com, a leading Chinese e-commerce service for the steel sector.