The 77 large and medium-sized steel mills in China, or members of CISA, realized aggregate profits of RMB85.297bn (US$13.5bn) during the first 11 months of 2011, with average profit margins at only 2.55%.

Results were affected by the high prices of iron ore, the entire sector incurred losses in December, which dragged down the industry’s sales profit margins to 2.42% for the full year of 2011.

China imported 686Mt of iron ore in 2011, up 68Mt (11%) from a year earlier and the CIF price of iron ore imports averaged US$163.84/t, up 28.13% year on year, resulting an additional US$25bn in procurement costs, or about 1.9 times the sales profits of the sector in 2011.

Financial forecasts published by the country’s large steel mills show this has been not good for their business performance in 2011. Angang Steel predicts net profits for 2011 to be a loss of RMB2.151bn ($341M). During periods of price increases for iron ore, Angang Steel could stop buying, but when the ore prices declined, the company could not take immediate measures to capitalise on the lower price.

Currently, most domestic steel mills are gradually linking their purchase prices to the spot market. Large steel mills, such as Baoshan Iron and Steel (Baosteel) had switched to a quarterly pricing model from a pricing model based on the average price of the preceding quarter. Baosteel estimates net profits for 2011 will fall 43.35% and Maanshan Iron and Steel expect profits to be down by more than 50% year on year. Jinan Iron and Steel announced on March 16 that its net profit for 2011 fell 37.38% y-o-y to RMB52.824M ($8.38M). According to a filing to the Shanghai stock exchange, the company’s operating revenue amounted to RMB32.185bn ($5.1M) in 2011, up 4.7% y-o-y, but operating profit was RMB80.167M ($12.7M) down 35.19% y-o-y.

Source: China Metals e-mail