Steel prices have risen by more than 1,000 yuan, and steelmakers have generally turned losses into profits.

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2017-03-20

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Steel Pipe Knowledge

Since the first half of last year, steel prices have begun to recover, driven by supply-side reforms and measures to phase out outdated production capacity. Taking rebar as an example, its average price on March 9 last year was 2,475 yuan per ton, while on March 9 this year it had risen to 3,852 yuan per ton—a 35% increase. Benefiting from rising steel prices, steel companies’ financial performance improved markedly last year. In 2015, Nangang Co., Ltd., Liugang Co., Ltd., and *ST Shaogang reported losses of 2.432 billion yuan, 1.189 billion yuan, and 2.596 billion yuan, respectively; in 2016, these three companies posted profits of 350 million yuan, 185 million yuan, and 101 million yuan, respectively. According to data from the China Iron and Steel Association, in 2016, large and medium-sized steel enterprises recorded total sales revenue of 2.80 trillion yuan, down 1.81% year-on-year, yet their combined profits reversed from a loss of 84.7 billion yuan in 2015 to a gain of 30.378 billion yuan, marking an overall turnaround for China’s steel industry. Since 2016, the steel sector has also embarked on a capacity‑reduction drive. However, according to the National Bureau of Statistics, China’s crude steel, pig iron, and steel output in 2016 reached 808 million tons, 701 million tons, and 1.139 billion tons, up 1.24%, 0.74%, and 2.30% year-on-year, respectively. China’s share of global crude steel production rose to 49.6%, an increase of 0.2 percentage points over the previous year. Domestic apparent consumption of crude steel stood at 709 million tons, up 2.08% year-on-year. This indicates that capacity cuts have not significantly curtailed steel output, suggesting that the sharp price surge is closely tied to fluctuations in demand. On March 5, the government’s work report for this year explicitly stated: “This year, we will further cut steel capacity by approximately 50 million tons and retire more than 150 million tons of coal‑related capacity. At the same time, we will phase out, suspend construction on, or slow down over 50 million kilowatts of coal‑fired power capacity, aiming to mitigate risks associated with excess coal‑power capacity, enhance industry efficiency, and create room for the development of clean energy.” Although this year’s targets—50 million tons of steel capacity and 290 million tons of coal capacity—are lower than last year’s actual reductions of 65 million tons of steel and 290 million tons of coal—the majority of last year’s cuts targeted inefficient capacity, while overall output continued to hit record highs. Consequently, this year’s supply‑side capacity reduction is expected to move toward more substantive progress, particularly with the complete elimination of “strip steel” capacity in the first half of the year, which will have a tangible impact on market supply. As the market enters the peak consumption season of “Golden March and Silver April,” demand is anticipated to improve further. On the supply side, the National Development and Reform Commission has announced a comprehensive ban on the use of power‑frequency and medium‑frequency induction furnaces for producing construction steel in the first half of the year. Meanwhile, during the Two Sessions, steel mills in North China were subject to a 50% production cut, and the Ministry of Environmental Protection conducted unscheduled environmental inspections—all of which are likely to constrain overall supply, especially for construction steel. Nangang Co., Ltd. On March 10, 2017, Nangang Co., Ltd. issued an announcement forecasting a significant increase in first‑quarter earnings for 2017. The company expects net profit attributable to shareholders of the listed company to reach 400–500 million yuan, representing a substantial year‑on‑year improvement. While strengthening its core steel business, the company is actively pursuing transformation and upgrading, planning to integrate its existing diversified industrial resources and external investment platforms to focus on emerging sectors such as energy conservation, intelligent manufacturing, and Internet Plus. It is also aligning closely with the development plan of Nanjing’s Jiangbei New Area. In 2015, the company established Jin Kai Energy Conservation and Environmental Protection Investment Holding Co., Ltd., consolidating its internal energy‑conservation and environmental‑protection operations into this platform, thereby laying a solid foundation for the growth of these industries. Moving forward, the company intends to adopt a strategy of collaborative partnerships combined with independent integration, concentrating on areas such as solid waste treatment, wastewater treatment, and waste‑heat power generation, with the aim of swiftly bringing relevant projects to fruition. Liugang Co., Ltd. As Guangxi’s sole integrated steel producer, Liugang holds an overwhelming dominant position in the region’s steel market. The company is also expanding into neighboring provinces such as Guangdong and Hainan, dispatching technical personnel to maintain long‑term presence in Guangdong. In 2015, its building‑material products saw a significant rise in market share across Guangxi. In the first half of 2016, the company further reduced rail freight rates for its steel products, making Yunnan, Guizhou, Sichuan, as well as Changsha and Guangzhou, part of a unified regional market with consistent transportation costs. Additionally, the company’s e‑commerce platform has introduced timely trading models—including spot sales, auction sales, and forward contracts—to serve key infrastructure projects and directly supply end users. *ST Shaogang *ST Shaogang released its 2016 annual report, reporting operating revenue of 13.973 billion yuan, up 25.38% year on year; operating costs of 13.326 billion yuan, up 6.40% year on year; and net profit attributable to shareholders of the listed company of 101 million yuan, compared with a loss of 2.596 billion yuan in the same period last year. Earnings per share (EPS) for 2016 stood at 0.04 yuan, versus −1.07 yuan in the prior year. As Guangdong Province’s largest steelmaker, *ST Shaogang’s main products—rebar, wire rod, and shipbuilding plates—command market shares of 13%, 16%, and 10%, respectively, within the province. The company’s successful turnaround in 2016 was primarily driven by a recovery in industry conditions, increased non‑recurring gains, and cost optimization.

Since the first half of last year, steel prices have begun to recover, thanks to a series of measures such as supply-side reform and the elimination of outdated production capacity. Taking rebar as an example, the average price on March 9 last year was 2,475 yuan per ton, while by March 9 this year it had risen to 3,852 yuan per ton, an increase of 35%.

　　Benefiting from rising steel prices, steelmakers posted a marked improvement in performance last year. In 2015, Nangang Co., Ltd., Liugang Co., Ltd., and *ST Shaogang reported losses of RMB 2.432 billion, RMB 1.189 billion, and RMB 2.596 billion, respectively; by contrast, these three companies recorded profits of RMB 350 million, RMB 185 million, and RMB 101 million, respectively, last year.

　　According to statistics from the China Iron and Steel Association, in 2016, large and medium-sized steel enterprises recorded total sales revenue of RMB 2.80 trillion, down 1.81% year on year. Meanwhile, their aggregate profits reversed from a loss of RMB 84.7 billion in 2015 to a profit of RMB 30.378 billion, marking an overall turnaround to profitability for the domestic steel industry.

　　Since 2016, the steel industry has also embarked on a capacity‑reduction process. However, according to data from the National Bureau of Statistics, in 2016 China’s crude steel, pig iron, and steel product output totaled 808 million tons, 701 million tons, and 1.139 billion tons, respectively—up 1.24%, 0.74%, and 2.30% year on year. China’s share of global crude steel production reached 49.6%, an increase of 0.2 percentage points compared with the previous year. Domestic apparent crude steel consumption stood at 709 million tons, up 2.08% year on year. Thus, capacity reduction has not directly curtailed steel output; consequently, the sharp rise in prices is likely closely linked to fluctuations in demand.

　　On March 5, this year’s Government Work Report explicitly stated: “This year, we will further cut steel production capacity by approximately 50 million tons and phase out more than 150 million tons of coal‑fired power generation capacity. At the same time, we will retire, suspend construction on, or slow down the development of over 50 million kilowatts of coal‑fired power capacity, in order to prevent and defuse the risk of overcapacity in the coal‑power sector, enhance the efficiency of the industry, and create room for the development of clean energy.”

　　Although this year’s targets have been scaled back compared with last year’s actual reductions—65 million tons of steel capacity and 290 million tons of coal capacity—the fact that most of the steel‑capacity cuts last year were of inefficient, substandard facilities means that output still reached record highs. This year, supply‑side capacity reduction is expected to move further toward substantive progress, with illegal “strip‑steel” capacity slated for complete elimination in the first half of the year, which will have a tangible impact on market supply.

　　As the market enters the peak consumption season of “Golden March and Silver April,” demand is expected to improve further. On the supply side, the National Development and Reform Commission has explicitly mandated the complete shutdown of core‑frequency and medium‑frequency furnace capacity for construction steel production in the first half of the year. Meanwhile, during the Two Sessions, steel mills in North China were subject to a 50% production cut, and the Ministry of Environmental Protection has conducted ad hoc environmental inspections, all of which will weigh on overall supply—particularly constraining the availability of construction steel.

　　Nangang Co., Ltd.

　　On March 10, 2017, Nangang Co., Ltd. issued an announcement forecasting a year-on-year increase in its first-quarter 2017 earnings. The company expects to report net profit attributable to shareholders of the listed company of RMB 400–500 million for the first quarter of 2017, marking a substantial year-on-year improvement.

　　At this stage, while enhancing the competitiveness of its steel business, the company is steadily advancing its transformation and upgrading. It plans to integrate its existing diversified industrial resources and external investment platforms, with a focus on developing emerging industries such as energy conservation and environmental protection, intelligent manufacturing, and Internet Plus, and actively aligning with the development blueprint of Nanjing Jiangbei New Area. In 2015, the company established Jin Kai Energy Conservation and Environmental Protection Investment Holding Co., Ltd., consolidating its internal energy‑conservation and environmental‑protection operations under this platform, thereby laying a solid foundation for the growth of these sectors. Moving forward, the company intends to adopt a strategy of collaborative partnerships combined with in‑house integration, concentrating on areas such as solid waste treatment, wastewater treatment, and waste‑heat power generation, with the aim of swiftly bringing energy‑conservation and environmental‑protection projects to fruition.

　　Liugang Co., Ltd.

　　The company is the only integrated steel producer in Guangxi, holding an overwhelmingly dominant position in the region’s steel market. At the same time, it is expanding into neighboring provinces such as Guangdong and Hainan, with technical personnel stationed on a long-term basis in Guangdong. In 2015, the market share of its construction‑materials products in Guangxi increased significantly. In the first half of 2016, railway freight rates for its steel products were further reduced, making Yunnan, Guizhou, Sichuan, as well as Changsha and Guangzhou, part of a unified regional market with consistent transportation costs. Additionally, the company’s e‑commerce platform has timely introduced various trading models—including spot sales, auction‑based sales, and forward contracts—while actively pursuing key projects and direct supply to end‑users.

　　*ST Shaogang

　　*ST Shaogang released its 2016 annual report. During the reporting period, the company recorded operating revenue of RMB 13.973 billion, up 25.38% year over year; operating costs totaled RMB 13.326 billion, an increase of 6.40% compared with the previous year; and net profit attributable to shareholders of the listed company reached RMB 101 million, reversing last year’s loss of RMB 2.596 billion. Earnings per share (EPS) for 2016 stood at RMB 0.04, compared with a loss of RMB 1.07 in the same period last year.

The company is the largest steel producer in Guangdong Province, with market shares of 13%, 16%, and 10% respectively for its main products—reinforcing bar, wire rod, and shipbuilding plate—within the province. The company’s successful turnaround to profitability in 2016 was primarily driven by a recovery in industry conditions, an increase in non-recurring gains, and cost optimization.

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