Forced consolidation could be damaging steel industry - experts
By Kiki Kang
Shanghai. June 3. INTERFAX-CHINA - Government efforts to consolidate China's steel industry are pushing privately-owned companies out of the market, and may be contributing to the sector's shrinking profitability, according to industry experts.
Last year, China's large- and medium-sized steel mills saw an average profit margin of just 2.91 percent, the lowest of any industry nationwide. And this dropped further to 2.86 percent for the first four months of this year. Underlying the profit shrinkage is the rising price of iron ore imports, which according to experts surged 57 percent in 2010 to hit approximately $157.60 per ton, Interfax previously reported. China's iron ore imports were worth RMB 85.7 billion ($13.21 billion) in the first four months of the year.
He Rongliang, a steel expert at the Distribution Productivity Promotion Center of China Commerce, believes that government efforts to consolidate the industry are damaging profits, according to a recent report from Caing.com, the website of business magazine Caixin. The majority of China's steel mills are now state-owned, said the expert, and privately-owned steel mills are being pushed out of the market by regulators, who favor state-owned firms in mergers and acquisitions (MA).
He cited the example of Rizhao Iron Steel Group (Rizhao Steel). In September 2010, regulators ordered the privately-own firm to sell a 67 percent stake to state-owned Shandong Iron Steel Group (Shandong Steel Group), despite the latter's poor track record. Rizhao Steel saw profits of RMB 4.5 billion ($694.32 million) in 2010, nearly 10 times the RMB 463 million ($71.44 million) brought in by Shandong Steel Group.
"If privately-owned players are forced out of the market, the steel industry will be sapped of any competition and the operating efficiency of mills will dip," said He.
Yu Liangui, chief information officer at Mysteel, told Interfax that depressed domestic steel prices were another major factor driving down profit margins. "Steel plate is about RMB 1,000 ($154.30) per ton cheaper on the China market compared to the U.S.," Yu said. "If China's steelmakers can raise steel prices, profit margins are sure to increase."
But according to Yu, consolidation is necessary to resolve the problem of overcapacity that is plaguing the industry and lift steel prices.
Furthermore, China's steel stockpiles remain high at 14 million tons, which is helping to keep prices down despite high consumption throughout the period from March to May, Umetal analyst Hu Kai told Interfax. Hu expects steel prices to drop by around RMB 200 ($30.86) to RMB 300 ($46.29) by the end of the year, further denting profits.