Most of the listed steel companies are expected to see sharp falls in 2008 full year earnings as the sector comes to terms with a slump in demand.

Nineteen of the 20 listed firms that have issued their preliminary earnings reports have estimated that they will incur steep losses with some of the companies expecting profits to fall nearly 50 percent over 2007. The only exception to this is Fushun Special Steel, which expects 2008 profits to increase 50 percent.

Analysts said the poor showing of the sector has more or less been to their expectations. Most of the mainland steel makers were caught unawared by the demand slump in the second half of 2008. The subsequent fall in the prices of a wide range of steel products forced most of the smelters to drastically write down the value of their huge inventories.

According to figures from the price-monitoring center under the National Development and Reform Commission, the average price of major steel products dropped from 6,278 yuan per ton in the second week of July to touch 4,307 yuan per ton by the end of November, followed by a slight recovery in December.

"Steel companies suffered huge losses from falling steel prices as raw material costs hovered at high levels when they bought them in the first half," said Zhang Tieshan, analyst, Mysteel.com.

The industry profit for the full year has been estimated at 85 billion yuan, down 41 percent from 144.7 billion yuan a year earlier.

Large steel processors have taken a bigger hit compared with their smaller counterparts who were more adept in responding to market situations.

Ansteel, the country's second largest iron and steel company, said it expects to report a 55 percent fall in net profit to 3.4 billion yuan in its preliminary earnings report. The company said the cost of its large inventory had wiped out nearly 30 percent of its earnings.

According to the 2008 third-quarter reports from 26 Chinese listed steel companies, the aggregate inventories were valued at a total of 235.8 billion yuan, up 72 percent from a year back.

Panzhihua New Steel & Vanadium Co, a manufacturer of hot-rolled steel sheets, strips, and plates, is likely to lose 430 million yuan, a 145 percent fall from the 950 million profit in 2007.

The recent upsurge in steel prices, however, has come as a silver lining.

According to the latest figures from Mysteel.com, major steel product prices have rebounded 11 to 22 percent in the Shanghai spot market, since their lows in mid-November. The price for hot rolled sheet, for instance, gained 44 percent since late November.

The country's largest producer Baosteel has increased its prices for key products in February and March after five consecutive months of price reductions. "This indicates an improvement in steelmakers' order books at the advanced stage of the de-stocking cycle," said Ulrich.

Frank FX Gong, chief China economist, JPMorgan Securities, however, warned that the rebound in steel and coal prices, which mainly stems from traders' restocking demands, may not be sustained, as end-user demand has yet to show signs of a recovery.

(China Daily February 24, 2009)