Baosteel sees China steel prices weakening in H2 on supply glut

Mon Aug 26, 2013 6:48am EDT

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By Ruby Lian and David Stanway

SHANGHAI, Aug 26 (Reuters) - Chinese steel prices are likely to weaken in the second half as supply continues to outstrip demand, a senior executive with Baoshan Iron & Steel , the country's biggest listed steelmaker by market value, said on Monday.

Overcapacity in China, which produces nearly half the world's steel, has thinned profit margins of domestic steelmakers, limiting the impact of any recovery in demand. Baosteel reported a 61 percent drop in first-half earnings.

With around 300 million tonnes of surplus steel capacity in China - equivalent to nearly twice the output of the European Union last year - Beijing is implementing measures to end the glut including curbing credit access to the sector.

"The rebound is lacking in strength to be sustained in the near term, and steel prices will be volatile in the second half and weaker than the first half due to uncertainties in demand and oversupply," Dai Zhihao, the company's general manager, told analysts at a closed-door briefing, according to an analyst who attended the meeting.

Dai said he expected steel demand to remain resilient over the rest of the year, but warned that supply would continue to outpace demand.

He said the price of steelmaking raw material iron ore would also rise faster than that of steel products in the third quarter, eating into profits.

Chinese steel futures have lost about 8 percent so far this year, but have been recovering since June, with demand from end-users picking up ahead of September and October, when demand is traditionally strong.

The drop in steel prices has similarly dampened appetite for raw material iron ore, with spot prices .IO62-CNI=SI down around 4 percent this year.

China's economy is showing clear signs of stabilisation, helped by policy support and some improvement in global demand, the state statistics bureau said on Monday.

However, worries over a supply glut means margins will remain under pressure.

Japan's Nippon Steel & Sumitomo Metal Corp, the world's biggest steelmaker by market value, said last week excess supply from Chinese mills will cap gains in Asian steel prices this year.

"During the next 12 months, (Asian) steelmakers' profits will remain at a historically low level given the persistent Chinese overcapacity," Moody's Rating Agency said in an Aug. 7 research note.

NO OUTPUT EXPANSION

Baosteel will not target any mergers or acquisitions in the world's biggest steel industry in the coming years but may boost investment in other sectors, the company's chairman said at the briefing, according to the analyst.

"We will neither plan any expansion in steel production nor consider taking the industrial downturn as an opportunity for any acquisitions, but we do not rule out any chances to invest in other new sectors," the analyst quoted He Wenbo as saying.

He said he sought to boost the share of non-steelmaking businesses, including technical and financial services, to as much as half of the firm's total profits in the future, as steel oversupply has squeezed mills' margins. He did not provide a timeline.

Baosteel plans to start production at its integrated Zhanjiang project in southeastern Guangdong province in 2016, Dai added. The project, approved in 2012, has an annual capacity of 9 million tonnes of crude steel.

Shares of Baosteel, which has a market value of about $11 billion, rose 1.2 percent on Monday amid a strong China stock market. (Additional reporting by Manolo Serapio Jr in SINGAPORE; Editing by Muralikumar Anantharaman)

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