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Philippines: Low-value steelmakers beat high-end peers
MANILA: Powered by China’s infrastructure push, Chinese construction steel producers are seeing their best profits in years, lording it over their high-value counterparts in a setback for Beijing’s years-long drive urging steelmakers to move up the value chain.
As its manufacturing engine sputters, the world’s second largest economy is increasingly relying on infrastructure spending to boost growth, spurring demand for construction steel products and lifting producer profit margins to near record levels.
Combined with recent cuts to low-quality steel capacity amid a war on pollution, this infrastructure drive looks set to brighten the outlook for construction-grade steelmakers just as their more sophisticated peers wrestle with sluggish demand from manufacturers and automakers.
“Because of capacity cuts and expected stronger infrastructure spending by China, there’s a strong upside for long products consumption which can boost rebar makers’ profits in the years ahead,” said Richard Lu, analyst at CRU consultancy in Beijing.
The profit margin on construction steel product rebar, also known as long steel, has surged more than 800% this year to around 1,100 yuan (US$162) per tonne in early June, according to data tracked by brokerage CLSA.
The margin for cold rolled coil, or CRC – otherwise referred to as flat steel – used in cars and home appliances, has dropped 47% to around 437 yuan over the same period.
Margins for high-end products like CRC have usually been higher than for rebar. Between 2012 and 2016, the average margin for CRC was 341 yuan per tonne compared to 107 yuan for rebar, CLSA data showed.
That has spurred mills in the world’s top steel producer to reopen once-shut rebar production lines to cash-in on soaring prices.
The strong demand has also cut traders’ inventories of rebar by more than half in less than four months.
“Our boss saw good profit on rebar, so he decided to resume the lines which had been shut for two years,” said a sales manager at Rizhao Steel Holding Group, a midsize steel producer in China’s eastern Shandong Province.
“The lines are expected to keep operating as the outlook for construction steel is good.
Improving infrastructure is high on Chinese President Xi Jinping’s agenda as he promotes his ambitious Belt and Road initiative – building road and rail connections with Central Asia and beyond.
Meantime, manufacturing has struggled, with China’s car sales falling for a second straight month in May for the first time since 2015, limiting demand for high-value flat products like CRC.
The reversal of fortune between Chinese producers of cheap, low-grade construction steel and makers of high-value steel was also triggered by Beijing’s crackdown on industrial pollution.
As it battles smog, China has vowed to eliminate induction furnaces – a highly polluting type of plant that produces mostly rebar – by the end of this month.
Analysts estimate induction furnaces produced about 50 million tonnes of rebar last year – about a quarter of China’s total rebar output.
So far this year, average margins for rebar were 572 yuan per tonne compared with 91 yuan in all of 2016, CLSA data showed.
The unexpected resurgence among producers of lower grade, cheaper steel is a setback for China’s efforts to modernise its massive steel sector, mainly by pushing the big, sophisticated steelmakers to swallow smaller rivals and shut inefficient ones.
Last year, China’s most technologically advanced steelmaker Baosteel acquired rival Wuhan Iron and Steel, creating the world’s second-largest steelmaker behind ArcelorMittal. – Reuters
Source: http://www.thestar.com.my/business/business-news/2017/06/16/lowvalue-steelmakers-beat-highend-peers/#YZX7k0d8dfa9gmPE.99