China: Listed steel cos' Q3 slows down, Q4 looks weak

The operating income and net profits of China's listed steel companies have shown substantial y-o-y growth in the first three quarters of this year, benefiting from the boom in the steel industry. However Q4 looks weak.

Profit growth slows in Q3

From Q3 standpoint, the overall growth rate in revenues and profits slowed down.

The Beijing-based Lange Steel Research Center tracked 37 listed steel companies. Of these, 36 achieved positive y-o-y growth in operating income, while 33 showed positive y-o-y growth in non-net profit.

The y-o-y growth rate in the operating income and net profit of most of them is lower than in H1. Two had a y-o-y decline in operating income, although all achieved a positive y-o-y growth in H1. Twelve had a y-o-y decline in non-net profit, and 4 had a negative y-o-y growth in H1.

In terms of net sales profit margins, 26 companies in Q3 posted lower than in H1. Some steel companies said the Q3 performance fell y-o-y, mainly due to factors like policy of reducing crude steel output. Steel output declined compared with the same period last year, and the margins in major steel products narrowed.

Shrinking volume hits profitability

In Q3, steel prices fluctuated in general, but, on average, were higher than in the same period last year.

In addition to price, the main factor affecting the operating income is the production and sales volume. Since June, domestic steel production has continued to fall from the previous month, and has also shown a downward trend y-o-y. According to data from the National Bureau of Statistics, domestic steel production decreased by 6.6%, 10.1% and 14.8% y-o-y in July, August and September respectively. Overall production and sales and growth of the same have been significantly reduced, restricting growth in income.

In terms of cost, the price of iron ore, the main raw material, in Q3, has been adjusted sharply, while the price of met coke has risen sharply. The cost of raw materials is higher by about 49% compared to the same quarter last year.

With production and sales shrinking and steel prices and costs at high levels, the overall growth rate of corporate profits slowed down in Q3, but some companies still maintained a relatively good level of profitability, while other were significantly weaker.

Q4 profitability weakening

Looking towards Q4, it seems the steel market will still show weak supply and demand trends.

On the one hand, domestic steel demand is declining, and supply-side production restrictions continue. Overall production and sales are unlikely to rebound, and the same for the listed steel companies are also unlikely to increase significantly. Fushun Special Steel stated in its third quarterly report that the state's policies to restrict the production capacity of iron and steel enterprises have brought more uncertainty to the company's production and sales in Q4. Affected by this, the company's production and sales in Q4 may decrease y-o-y.

At present, the negative impact of raw materials costs has not been fully unleashed, and the probability of later fluctuations in steel prices is greater. In case of weak production, sales and prices, the number of steel companies with negative growth in operating income in Q4 may increase, and as income expansion slows, it is difficult to achieve sustained high-speed growth in profit.

In October, profits of the main steel products were significantly narrower than in September. In addition, the market-oriented reforms of electricity tariffs will affect electricity costs of steel companies. The profitability of listed steel companies in Q4 may weaken.

After the epidemic, thanks to the rapid recovery of downstream industries, steel demand continued to grow, although prices fluctuated. The steel industry ushered in a business cycle, and corporate profits grew rapidly. In the first three quarters of this year, many listed steel companies said their performance was historically the best.

As a highly cyclical industry, steel demand fluctuates, while price fluctuations are more obvious, and corporate profits also show strong cyclicality. But, at present, the prosperity of the steel industry has fallen.

Outlook

Looking to the future, the industry's output control may become the norm. In the context of entering the era of stocks, it is difficult for companies to rely on volume expansion to expand their income and profits, and they need to actively plan to change their development mode.

They may look at mergers and acquisitions to expand market share and increase overall profitability. Baosteel Co Ltd said that in the context of stock competition, mergers and acquisitions and integration will be the only way to expand market share. Future mergers and acquisitions will be concentrated in specific areas.

On the other hand, operating efficiency will be improved by accelerating production line upgrades and advancing smart manufacturing, so as to reduce costs and increase efficiency.