China’s Top Steel Mills Warn on Outlook After Profit Rebound (2)

(Bloomberg) -- The good times in the world’s top steel producer may not last long. China’s biggest mills including Hesteel Co. Ltd. are warning that the improved conditions and rising prices in the first half that helped them to lift earnings may soon be about to give way.

“Industry prospects are not optimistic,” Hesteel, the listed unit of China’s biggest mill by output, said late on Tuesday as it reported its best six months since 2011. While the market had gained some momentum in the half, helped by a factors including low inventories, the sector remains on a downward trend and demand didn’t rebound significantly, it said.

The gloomy outlook casts doubt over whether the recovery in China’s steel market -- which benefited after Beijing boosted credit and infrastructure spending in the first half and moved to cut industry overcapacity -- can be sustained. Citigroup Inc. has said indicators signal sluggish growth in China for the rest of the year, and the China Iron & Steel Association warned earlier this month that there may be significant declines in demand and output.

The supply-and-demand balance in China’s steel market hasn’t materially improved, Baoshan Iron & Steel Co. Ltd., the listed unit of the No. 2 producer, said on Tuesday as it reported a 9 percent rise in net income on the year to 3.47 billion yuan, after a net loss of 2.16 billion yuan in the second half. Profit increased mainly because of cost cuts, the company said, adding that conditions may remain unfavorable in the second half.

‘Quite Good’

“The commentary from the companies has been cautious but actually the third quarter has started fairly well and we think things are looking quite good,” Daniel Kang, an analyst at JPMorgan Chase & Co., said by phone. “Inventories are still low. The fourth quarter is typically peak season and we’ve already started to see prices and margins start to improve again.”

Hesteel shares traded 1.5 percent lower at 3.34 yuan in Shanghai at 10:56 a.m. local time after earlier dropping as much as 2.1 percent. Baoshan’s stock hasn’t traded since June 24 after the company announced its parent group was in talks about a potential restructuring.

Steel’s Surge

Benchmark steel prices surged 31 percent in the first half, resuscitating mills’ profits and helping to underpin a recovery in iron ore, which has rallied 36 percent in 2016. Margins at Chinese producers swung from deeply negative in November to the best since 2009 in April as steel output and exports climbed to records. The country makes half of the world’s steel.

Hesteel, based in China’s major steelmaking province of Hebei, said net income in the six months through June rose to 409 million yuan ($61 million) from 357 million yuan a year earlier and 216.5 million in the second half of 2015, as revenue fell 11 percent. Baoshan’s revenue dropped 3.5 percent to 78 billion yuan from a year earlier.

Of China’s other top state-owned producers:

• Angang Steel Co. Ltd. boosted net income 94 percent on the year to 300 million yuan.

• Beijing Shougang Co. Ltd. posted net income of 17 million yuan, from a net loss of 223 million yuan a year earlier.

• Wuhan Iron & Steel Co. Ltd. said its net income was 273 million yuan, down 48 percent on the year.
  
  

Neither Baoshan nor Hesteel gave updates on the mergers being considered in China’s fragmented industry. Baoshan’s parent is talking with Wuhan Iron & Steel Group Corp., the companies said in June, while Hesteel’s owner may join with Shougang Group, people familiar with the matter have said.

The combinations would create two powerhouse producers in the north and south of the country -- the northern tie-up involving Hesteel would be the biggest in the global industry since the creation of ArcelorMittal last decade -- and follow pledges by China’s Communist Party to restructure and streamline the country’s sprawling state-owned enterprises.

(Adds analyst’s comment in fifth paragraph.)

--With assistance from Winnie Zhu and Tian Chen To contact Bloomberg News staff for this story: Martin Ritchie in Shanghai at mritchie14@bloomberg.net. To contact the editors responsible for this story: Jason Rogers at jrogers73@bloomberg.net, Jake Lloyd-Smith

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