When will the domestic steel industry return to profitability? Recently, UBS highlighted in its "Steel and Coal Industry Outlook" meeting that due to the long-term downward trend in mineral prices, the steel industry is expected to face losses in 2013. Will it recover by 2014? This question has been on the minds of many industry observers.
China’s steel sector has been plagued by terms like “losses,†“meager profits,†“crises,†and “dilemmas.†Once a booming industry, it now seems to be struggling. Since the end of last year, raw materials for steelmaking have surged sharply, while steel prices have risen much more slowly. As a result, many previously profitable steel companies have returned to the red.
Over the past month, domestic steel prices have seen a slight upward trend, but this hasn’t translated into improved profits. According to data as of January 11, 55.21% of the 163 sampled steel mills were operating at a loss—up from 24.07% on December 28, 2012. The situation is clearly worsening, and the outlook remains bleak.
Historically, when steel prices hit their annual low in late August last year, nearly 90% of steel mills were unprofitable. However, as prices rebounded, the number of losing mills dropped quickly and remained below 10% for a long time. But since the end of last year, the rapid rise in raw material costs—especially iron ore—has outpaced steel price increases, pushing many mills back into the red.
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 compared to the start of December. Another key input, coke, has also been on the rise since early September, with no sign of slowing down.
In recent years, steel prices have consistently climbed alongside iron ore prices, putting steel companies at a disadvantage. In 2012, the performance of Chinese steel firms was particularly poor.
According to data from the China Iron and Steel Association, although steel companies saw a profit in November, they still couldn't offset previous losses. From January to November, the association's members reported an overall loss of 1.97 billion yuan, with only five months out of eleven showing positive results.
The main causes of the industry’s losses include high iron ore prices, low steel prices, and overcapacity. When discussing iron ore, many industry insiders are questioning whether the long-term trend is indeed downward.
UBS believes that due to the abundant supply of iron ore, its price will slightly decline in 2013 and is expected to fall by about 10% annually from 2014 to 2015. With this expected drop in iron ore prices, and increased control over steel production capacity, UBS predicts that the Chinese steel industry could see a significant improvement in profitability in 2014.
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