Friday, January 27, 2017

China’s Baosteel posts eightfold surge in full-year profit

China’s largest steel group notched a 770 per cent annual increase in its net profit for 2016, as higher prices, a major merger and cost cutting combined to suggest the ailing industry is forging a recovery.  State-controlled Baosteel announced the unaudited figures in a filing to the Shanghai stock exchange.  Net profit attributable to shareholders in 2015 was Rmb1.01bn ($148m), suggesting 2016 net profit of about Rmb8.8bn, according to Financial Times calculations. The profit surge is a positive sign for the debt-saddled legacy industry of Chinese steel, which collectively lost some Rmb60bn in 2015 and faces agonising capacity cuts in an effort to control prices. Due largely to an excess of supply and slumping demand over the past few years, Chinese steel has been targeted with anti-dumping penalties by a number of countries as mainland producers have tried to export their excess output.  While Baosteel’s internal strategy did play a role, last year’s profit surge was mainly due to a massive improvement in overall industry conditions in 2016 as steel prices nearly doubled over the course of the year, says Wang Jianfu at Steelhome, a Shanghai-based steel market consultancy.  That is partly due to supply-side reforms: China’s government announced it had eliminated 50m tonnes of capacity in 2016 and is set to flush out more in 2017. However, according to an HSBC research note, much of the eliminated capacity was already idle or obsolete, and the effect on actual supply was small. China produced about the same amount of steel in 2016 — 805m tonnes — as it did in 2015.  HSBC noted that government stimulus measures for the steel industry in 2016 included an expansion of credit to the sector as well as a relaxation of property policies.  Related article Chinese steel: those blasted mills Beijing needs to ensure that steel capacity keeps falling in the new year Hu Yanping, editor in chief at CUSteel, a steel industry service platform, said the steel industry as a whole “benefited significantly from the strong growth of commodities”, pointing to a rise in domestic steel consumption including demand from burgeoning Chinese auto sales. Baosteel’s listed arm, Baoshan Iron and Steel, last year was merged with the listed arm of rival Wuhan Iron & Steel as part of Beijing’s effort to consolidate the industry and improve efficiency. That nearly doubled Baosteel’s asset base, but Baosteel says Wuhan has not yet been consolidated in Baosteel’s balance sheet.  The company maintains that the increase in profitability last year was mainly the result of a “boost of performance from the execution of reform initiatives”.  State-owned steel groups including Baosteel have large work forces that they have found difficult to reduce due to political pressure from local governments. Baosteel said no cuts had been made in its workforce.

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