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Steelmakers may suffer squeeze

By Jin Jing (China Daily)
Updated: 2008-08-01 09:37

A worker at a steel mill in Zhejiang province. [China Daily]

The profit margin of Chinese steelmakers is likely to be further squeezed in the second half of the year due to the possible shrinkage of market demand.

"The government's continuing tightened monetary measures, combined with declining steel exports, are expected to dampen demand," said Jiang Qiu, an analyst at Guotai Jun'an Securities.

China exported 5.22 million tons of steel in June, down 6.12 percent from May. "The exports decline shows the decreasing demand overseas," said Zhao Zhicheng, an analyst at Essence Securities, in a report.

The possibility of the government increasing the steel exports duty, which would curb exports, can also not be ruled out, said Zhao.

Meanwhile, the rising costs from iron ore, coking coal, fuel, transportation and labor are continuing to eat into steelmakers' profits.

Although the earnings reports of several steel companies in the first half have restored some confidence in investors, analysts said the corporate profit margin is expected to be narrower.

Of nine listed steel companies that reported earnings, eight have reported profit increases. Guangzhou Iron and Steel Co Ltd reported that earnings surged over 200 percent from January to June, and Jinan Iron and Steel said profit increased by more than 50 percent.

But statistics from China Iron and Steel Association showed the profit margin of mid-siz and large steelmakers was 7.61 percent in the first half, down 0.95 percentage point from the same time last year.

Zhao Xiange, an analyst at Everbright Securities, said the weak market demand has triggered the fall of steel product prices in July. "The high transportation fee and natural disasters curb the demand of domestic users," said Zhao.

"Steel profits are expected to go downward in the fourth quarter, when market supply will increase but demand will still be at a low level," Jiang said.