Nation's reform efforts in steel industry bear fruit

Thanks to the implementation of supply-side reforms, the pattern of supply and demand in the steel sector in China has improved since 2016, with steel companies' operational and financial situations improving and the sector entering a new stage of development, a recently released report said.

The profitability and debt levels of most steel companies in China have improved significantly compared with the situation before the supply-side reforms, said a credit analysis of steel sector issuers released by S&P Global (China) Ratings. The report was based on a sample of 24 steel companies since the implementation of the supply-side reforms.

While significant differences still exist between companies in terms of leverage, steel enterprises in China have looked to enhance their position and market share by continuously increasing scale and capacity in the past decade, it said.

China is currently the world's largest steel producer, with crude steel production boosted by a resilient property market and robust demand, climbing to record 990 million metric tons in 2019, representing more than half of global output.

The iron and steel enterprises joining the China Iron and Steel Industry Association recorded sales revenue of 2.09 trillion yuan ($302 billion) during the first half of this year, a year-on-year increase of 1.18 percent, data of the General Administration of Customs showed.

Steel imports also increased significantly during the same period, with China importing 7.343 million tons of steel, up 26.1 percent year-on-year.

The output of iron and steel has increased steadily. Data from the National Bureau of Statistics showed the national output of pig iron, crude steel and steel was 432.68 million tons, 499.01 million tons and 605.84 million tons, respectively, or up 2.2 percent, 1.4 percent and 2.7 percent year-on-year.

An industry insider believes China's demand recovery in downstream sectors such as real estate, construction, automobiles, and shipping in the second quarter from the first three months since COVID-19 was brought under control has driven up steel output.

"Output of crude steel increased 1.4 percent year-on-year in the first half of this year. But high iron ore costs squeezed steel mills' profitability and may continue to weigh on margins," said Zhu Yi, a senior analyst for metals and mining at Bloomberg Intelligence.

"China's supply-side reform has reduced overcapacity in the steel industry by closing down those with issues of pollution and outdated capacity while controlling new capacity construction, and helped reduce steelmakers' debt levels. But we expect the government will continue to fortify the results of the supply-side reform and focus more on upgrading the steel industry."

China's steel industry is still oversupplied with low-end commodity-grade steel products, but is in a supply deficit for high-end products such as high strength steel. By producing more high value-added products, steel mills can increase revenue and widen margins, she said.

Although China's steel output is large, most products are ordinary steel, with the proportion of special steel in crude steel output still accounting for a small percentage.

With profit margins being squeezed by iron ore prices, many Chinese mills have been forced to change their steel products sales structure this year to higher-end products.

S&P Global (China) Ratings said expanding scale will help enterprises achieve economies of scale, reduce energy consumption per unit, depreciation and costs, and support their bargaining power with upstream and downstream industries, it said.

As the country has been promoting supply-side reforms, speeding up mergers and acquisitions and trimming excess capacity for the healthy development of the Chinese steel industry, the country's top steel-maker China Baowu Steel Group said on Aug 22 it would take a controlling stake in Shanxi-based stainless steel giant Taiyuan Iron & Steel (Group) Co, to facilitate the giant's goal of producing 100 million metric tons of steel every year.