UPDATE 2-China Baosteel net down on stainless steel slump

(Adds analyst comment, background)

By Alfred Cang

SHANGHAI, March 26 (Reuters) - Baoshan Iron and Steel Co (600019.SS), China's top steel maker, reported an unexpected fall in 2007 net profit on Wednesday, blaming weakness in the stainless steel market following a plunge in nickel prices.

Baosteel, which competes with POSCO (005490.KS) and Nippon Steel Corp. (5401.T) to supply China's market, said net profit slid 3 percent to 12.72 billion yuan ($1.81 billion) last year -- the first annual fall since 2001.

The result, one of the first earnings shocks by a major company during China's annual corporate reporting season, was nearly 10 percent below the average forecast of 14.01 billion yuan given by five analysts polled by Reuters.

For the October-December quarter, net profit shrank to about 2.17 billion yuan, the lowest for any quarter of 2007, according to Reuters calculations. In the fourth quarter of 2006, Baosteel earned about 3.92 billion yuan.

Some analysts said prospects for a somewhat better performance in 2008 might avert a further sharp fall in Baosteel shares, which are down 18 percent so far this year, outperforming a 31 percent plunge by Shanghai's main stock index .SSEC.

"The chances of margin erosion in its carbon steel business may be very slim in 2008 if demand holds up," said Helen Lau at Daiwa Securities.

"Earnings in 2008 may not be impacted seriously by stainless steel because nickel prices may stay relatively stable, while for 2009, earnings growth will be driven by volume growth given the commissioning of some internal expansion projects."

But Baosteel, which dominates China's carbon steel market, has been expanding aggressively in stainless steel and specialty steels in an effort to achieve higher margins, and the 2007 results suggested its efforts were having only mixed success.

Baosteel's turnover for 2007 surged to 191.56 billion yuan from 162.33 billion yuan a year earlier.

But its stainless steel products business made a loss in 2007 as prices slumped following a tumble in the price of nickel, a key raw material.

"Sales prices fell more steeply than the decrease in production costs during the plunge in nickel prices," it said.

SELLING PRICES RISE

Baosteel sold 22.6 million tonnes of steel products last year, up 6.5 percent from 2006, including 9.17 million tonnes of hot-rolled steel plate used in heavy industry and 7.70 million tonnes of its flagship cold-rolled steel plate, used in cars and home appliances.

The firm said it planned to produce 24.55 million tonnes of crude steel and sell 24.19 million tonnes of steel products in 2008, in order to achieve turnover of 200 billion yuan. But it acknowledged it faced major uncertainties.