In 2011, production costs for Chinese steelmakers jumped 15% due to a combination of an increase in the resource tax on domestic ore and rising prices for fuel, say CISA.

From February 1st, the government raised the resources tax on iron ore miners from RMB 9/t of ore mined to RMB 12/t.

The cost of metallurgical coal has also been increasing for several years and the rising price of domestic and imported ore will also impose a huge burden on domestic steelmakers.

Moreover, higher electricity cost will add to the production cost of steel mills, as well as increased labour costs with demands for salary increases.

The sector incurred a combined net loss of RMB 1.034bn (US$164M) in the January-March period, compared with the RMB 25.8bn profit ($4.1bn) over the same period last year. Sales in the period went down 0.95% from a year earlier to RMB 863.888bn ($137bn).

A third of the country’s steelmakers posted losses in the first quarter, with the total loss amounting to RMB 9.098bn ($1.4bn). In March, profitability of the sector showed sign of recovery as the industry turned from loss to profit in with a combined profit of RMB1.77bn ($281M) in the month.

Despite the improvement in March, the sector remains in ‘grim difficulties’ according to CISA as a majority of steel mills struggled to pass on increasing production cost in the first quarter. More than 80% of the CISA’s member steelmakers registered losses or significant slow-down in growth in Q1 2012 as they face escalating uncertainties that involve sluggish demand, low market prices, and rising production costs. A sluggish market demand amid the country’s high production level has been a headache, and troubles the sector especially at times of macro-economic uncertainties.

Source: China Metals e-mail