When will the domestic steel industry return to profitability? Recently, UBS highlighted in its "Steel and Coal Industry Outlook" meeting that the long-term trend of declining iron ore prices is expected to push the steel industry into losses in 2013. The question now is: Will the sector recover in 2014?
China’s steel industry has been plagued by terms like “losses,†“meager profits,†“crises,†and “dilemmas.†Once a booming sector, it now appears sluggish. Since the end of last year, raw material costs for steelmaking have surged dramatically, while steel prices have not kept up, causing many previously profitable companies to fall back into the red.
Over the past month, domestic steel prices have seen a slight increase, yet many steel producers are still reporting losses. According to data from January 11, 55.21% of the 163 surveyed steel mills were operating at a loss, compared to 24.07% on December 28, 2012. This sharp rise in losses indicates a worsening situation.
Historically, when steel prices hit their annual low in late August last year, nearly 90% of steel mills were losing money. As prices rebounded, the loss rate dropped quickly and remained below 10% for a while. However, since the end of last year, the rapid increase in raw material costs—especially iron ore—has outpaced steel price growth, leading to renewed losses for many companies.
As of January 15, the composite steel price index stood at 139.45 points, up just 4.76% from early December. Meanwhile, the iron ore price index reached 143.9 points, a significant 25.68% increase over the same period. Coke, another major fuel, has also seen a steady rise since early September, with no signs of slowing down.
In recent years, steel prices have risen in tandem with iron ore, putting pressure on steel companies to work harder for lower margins. In 2012, the industry's performance was particularly bleak.
According to the China Iron and Steel Association, although steel companies made a profit in November, they couldn’t fully offset previous losses. From January to November, the association’s members reported an overall loss of 1.97 billion yuan, with only five months showing profitability.
The main causes of the industry’s struggles include high iron ore prices, stagnant steel prices, and overcapacity. When it comes to iron ore, many industry insiders wonder whether the long-term trend is indeed downward.
UBS predicts that due to an oversupply of iron ore, prices will slightly decline in 2013 and could drop by around 10% annually from 2014 to 2015. With this expected decline, the Chinese steel industry is projected to face losses in 2013. However, by 2014, as iron ore prices fall further and domestic steel production capacity is better controlled, the industry may see a significant improvement in profitability.
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