Exorbitant cost jumps for fuel and the rapid decline in demand for steel at home and abroad resulted in huge losses for China's iron and steel firms in the last quarter in 2008. There is little hope the steel industry will be able to shake its sluggishness this year.
Serious overcapacity has China's steel industry in its grip now. Weeding out backward production capacity and significantly reducing costs are the keys for China's steel industry to get it through what is certain to be a most difficult year.
According to China Business News, Zhang Xiaogang, Chairman of the China Iron and Steel Association (CISA), yesterday pointed out that a major characteristic of the steel industry in 2008 was ups and downs in production and prices. "Steel prices began a steep fall in September, output greatly declined, exports fell, domestic steel demand turned negative in the third and fourth quarter, and distributors threw up their hands," Zhang said. Such drastic volatility in one year is unprecedented in the history of the Chinese industry.
Steel market performance in last year’s second half was not a pretty sight for iron and steel firms. The domestic industry’s June profits totaled 17.83 billion yuan, but by September they had plummeted to 3.221 billion yuan, and in October losses amounted to 5.835 million yuan, in November 12.78 billion yuan. Despite a slight recovery of prices in December, losses still reached 29.122 billion yuan.
The main reason for the huge fourth quarter losses, aside from the global economic downturn, was the sharp rise in fuel and materials prices. The cost of coking coal in 2008 rose 86.51% over the previous year, coal injection by 60.17%, domestic iron ore concentrate 47.44%, while import iron ore jumped by 38.84%. The sharp rise in fuel and materials costs greatly boosted production costs. To produce pig iron for steel-making, for example, costs rose 51.62% over the previous year.
The situation of iron and steel enterprises has yet to improve in 2009. "This year will be the most difficult year for the nation since the beginning of the new century and also the hardest year for iron and steel industry," says Zhang. He estimated that further shrinkage of the international market and rising of trade protectionism will significantly decrease direct and indirect exports of China's steel.
Worse still, the market slowdown has shoved the industry into serious overcapacity. CISA’s latest statistics show that by the end of 2008, crude steel production capacity in China's was 610 million tons, looking at 660 million tons considering the 50 million tons under construction. In 2008, demand in the domestic market hit only 500 million tons and exports 59.18 million tons. Affected by the economic situation at home and abroad, new capacity last year will be released in 2009, and plate and strip steel face more widening overcapacity in the second half of this year.
SourcE: China Stakes
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