UPDATE 2-China's Baosteel suspends production at loss-making plant

Thu Sep 27, 2012 12:24am EDT

* Firm halts output at loss-making plant on high costs

* Chinese steel makers battling over capacity, weak steel prices

* Plant has annual capacity of 3 million tonnes

* Baosteel output in 2011 was 43.34 million tonnes (Adds details, comments from Baosteel source)

By Fayen Wong and Ruby Lian

SHANGHAI, Sept 27 (Reuters) - Baoshan Iron & Steel Co (Baosteel), China's biggest listed steelmaker, said it has suspended production at a loss-making plant in Shanghai, in a sign of the intense pressure on the sector as steel prices trade near three-year lows.

The steelmaker is one of the first major Chinese mills to publicly announce it is suspending production, but with the world's second-biggest economy cooling and banks restricting lending to an industry that built up $400 billion of debt during years of double-digit growth more suspensions are likely.

The plant, in Shanghai's Luojing district which produces steel plates used for ship building, oil rigs and construction, has been losing money due to weak demand and high costs, the firm said in a statement to the Shanghai Stock Exchange.

"With demand from the shipbuilders so weak, other producers such as Angang Steel are also facing pressure," said Helen Lau, a senior metals analyst at UOB-Kay Hian, noting further suspensions would depend on whether firms could compensate losses from other profitable units.

In an effort to kickstart the economy, Beijing approved some $150 billion worth of infrastructure projects earlier this month, but there are doubts steel demand in the world's largest producer will pick up soon.

"The government's infrastructure investment may only improve sentiment ... but I don't expect a big lift in steel demand," Zhang Dianbo, assistant president of Baosteel, told reporters at an industry conference.

China's crude steel production fell 2 percent in mid-September to 1.857 million tonnes per day after a surprise 1.2 percent increase in early September.

HEAVY LOSSES

UOB-Kay's Lau said the Loujing plant was also more costly to run because of its technology, whereby furnaces use the Corex smelting process of gasifying non-coking coal to produce pig iron.

A Baosteel source, who has worked at the Luojing plant, told Reuters the facility would eventually be shut as part of broader plans to relocate operations away from Shanghai.

Chinese steel makers, already battling over capacity, have been struggling with razor thin profits or losses since Beijing's clamp down on the real estate sector hit steel demand.

The Luojing plant, which Baosteel acquired in 2008 for 14 billion yuan ($2.22 billion) and has an annual capacity of 3 million tonnes, halted its first furnace in July 2011, according a report in a weekly publication called Investor China.

The second furnace, which was operating at a monthly loss of 100 million yuan, was suspended along with the complex earlier this month, the paper said, citing a worker at the plant.

IRON ORE PRICE

China's steel rebar futures, mainly used in construction, have slumped as much as 24 percent this year to touch a three-year low of 3,206 yuan in early September. Prices has since ticked up after the government approved some $150 billion yuan worth of infrastructure projects.

Weak demand has also hurt iron ore, a key steel making ingredient. The price of ore .IO62-CNI=SI has fallen to three-year lows at below $87 a tonne earlier this month as waning steel demand in China cut demand for the raw material.

Iron ore prices have since bounced back to above $100, but remain 30 percent off this year's peak as Chinese steel mills curb output.

Baosteel posted a 53-percent drop in first-half profit, excluding one-off items, and expects steel prices to remain under pressure for the rest of this year.

Baosteel shares slipped 0.22 percent by 0339 GMT, against a 0.27 percent gain in the broader Shanghai index. ($1 = 6.3020 Chinese yuan) (Additional reporting by Samuel Shen, David Stanway and Manolo Serapio in SINGAPORE; Editing by Ed Davies)

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