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Analysts expect Chinese steelmakers to recover in Q4'19 on higher demand, prices

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Analysts expect Chinese steelmakers to recover in Q4'19 on higher demand, prices

After Chinese steelmakers broadly saw their earnings plunge in the third quarter, analysts noted some recent changes in the demand picture, expecting a recovery in companies' earnings for the last quarter amid improving steel margins.

According to data released by the National Development and Reform Commission on Nov. 27, members of the China Iron and Steel Association, a government-funded organization representing steelmakers, saw their profit dropping 34.1% year over year in the first 10 months of the year, despite recording an 11% year-over-year increase in their sales income during the same period, Shanghai Securities News reported Nov. 27. Among 29 major listed Chinese steelmakers, only five of them posted a year-over-year increase in net profit for the first nine months of the year, China Metallurgical News reported Nov. 12.

After posting a yearly decline of as much as 88% in third-quarter net profit, major steel producers including Baoshan Iron & Steel Co. Ltd., Hbis Co. Ltd., Angang Steel Co. Ltd. and Maanshan Iron & Steel Co. Ltd. attributed the significant drop to pricey raw materials, including iron ore, following supply disruptions in Australia and Brazil and decreased steel prices.

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Earlier this year, iron ore production in Brazil from the world's largest exporter, Vale SA, was hurt after a dam collapse in January, while the Australian seaborne supply was tightened because of natural disasters in March.

The average value of the China iron ore price index was up 33.3% on a yearly basis during the third quarter, as Maanshan Iron & Steel, which saw its net profit plummet 85.1% year over year in the third quarter, noted in its quarterly report. In the futures market, Dalian Commodity Exchange's iron ore contract for delivery in September reached 909 Chinese yuan per tonne in July, the first close above the 900-yuan level since early 2014, Chinese media Caixin reported.

However, steel producers recently saw their margins improve with domestic prices for steel, especially construction steel rebar, rallying in November, according to Xu Ruoxu, a Shanghai-based nonferrous metals analyst with brokerage firm Shenwan Hongyuan Securities. This is despite the fact that the demand for steel is usually expected to slow in winter in China as construction activities are halted in most of the northern areas due to the low temperature, Xu added.

The Shanghai Steel Rebar Index compiled by data provider Mysteel gained 9% in November after once hitting 4,232 yuan per tonne in the month, the highest this year since May 5. On the other hand, the price of iron ore started moving lower in October, helping steelmakers profit better in November, Xu said.

A Beijing-based steel analyst said the most significant increase in steel rebar prices is seen in southern cities such as Shanghai and Guangzhou, where there are more construction activities than previous years.

"This winter we have seen stronger demand for steel rebar products from the southern markets, where workers at construction sites are struggling to finish their work before the Chinese New Year," the analyst said, adding that it "greatly" helped steelmakers improve their profitability in November.

In addition to the construction demand, Xu attributed the recent surge in steel prices to positive macroeconomic factors, which will continue to support steel prices into 2020.

Xu said the recent policies signaling more fiscal support for the Chinese infrastructure sector will further boost the demand for steel, adding that a politburo meeting chaired by President Xi Jinping on Dec. 6 committed more infrastructure spending for 2020.

Beijing has urged more investments in infrastructure this year as part of its efforts to deal with the deceleration in the country's economy as China's GDP growth slowed to a near 30-year low of 6% in the third quarter. In November, the Caixin/Markit Manufacturing Purchasing Managers' Index rose to 51.8, from 51.7 in October, the fastest pace in about three years, Reuters noted Dec. 2.

Xu expects the margin of steel rebar to outperform other steel products to help its producers achieve better-than-expected earnings growth in 2020.

As of Dec. 11, US$1 was equivalent to 7.04 Chinese yuan.