China's major steel mills have started to reduce their output in the first half of this year, the China Iron & Steel Association (CISA) announced Tuesday, in an effort to cut losses incurred by the sector's overcapacity. The CISA said 33 companies out of its 74 members have seen production drop year-on-year.
The 74 steel producers, which account for around 80 percent of the country's total steel output, reduced their production by 310,000 tons in the first half, a drop of 0.1 percent year-on-year, data from the association showed.
Increasing costs and sluggish steel prices have affected steel producers' profits. In the first half, the 74 steel producers reported combined profits of 2.385 billion yuan ($373.06 million), a plunge of 95.8 percent compared with a year earlier, and over one-third of them suffered losses.
"Companies in the steel sector should be prepared for long-term difficulties," Zhang Changfu, secretary-general of the CISA, said Tuesday. Sluggish domestic demand and low steel product prices are causing capital pressure for the producers, and "credit from the banks is expensive and hard to obtain," according to the CISA.
China's major steel mills are burdened with 200-300 billion yuan of debts in total, but the capital problems in the sector are under control and a major financial breakdown is unlikely, said Qu Xiuli, deputy secretary-general of the association.
Significant growth in steel exports in the first half helped partly consume domestic production capacity. CISA data showed that exports rose by 25.6 percent to 21.4 million tons in the first half, mainly driven by demand from Southeast Asia, the Middle-East, Latin America and Africa. But at the moment, low value-added products still account for a large part of China's steel exports. The average price of exported steel products is $300 per ton, lower than that of imported products. "Chinese steel products still mainly rely on price advantage to compete in the overseas market," Wang Guoqing, a senior analyst at Beijing Lange Steel Information Research Center, told the Global Times.
Smaller steel mills, meanwhile, have been increasing production in the first half. Data from the CISA showed that small-sized steel mills increased their production by 12.9 percent in the first half. "Small steel mills enjoy certain advantages in costs and their management can also respond very quickly to market changes," said Wang.
Growth in fixed-asset investment in the sector slowed to 12 percent in the first half, according to the CISA, 4.8 percentage points lower than in 2011. But officials with the CISA noted that quality projects in the sector should still be encouraged. China's steel producer Baosteel is mulling a 69 billion yuan project in Zhanjiang, Guangdong Province. "But for the new projects the problem of how to make profits remains," said Qu.