China’s steel companies are on the edge of making a tremendous loss due to the sluggish domestic market, as profits of large and medium-sized steelmakers in the country was slashed by 94.26% year on year in the first five months of 2012 resulting in the ratio of return on sale dropping to a mere 0.17%.

The steel price index on the local market also dropped to 117.52 points, hitting a 23-month record low by the end of June. According to the China Iron and Steel Association (CISA), large and medium-sized steel companies during the five months of the year made RMB 1495.1bn ($234.6bn) of sales revenue, 1.6% below the same period a year earlier, along with a combine profit of merely RMB 2.53bn ($397.1M) down RMB 41.56bn ($6.523bn) or 94.26% below the same period last year.

Steelmakers in the red incurred an aggregate loss of RMB 11.75bn ($1.84bn) in the five month period, as compared with losses of RMB 414M ($65M) in the same period of last year. Although steel mills in the period March-May gained meagre profits, they witnessed a month-on-month decline in profit during the this period, and this trend is seen to accelerate.

CISA also noted that, by the end of June, China’s steel price index had suffered a decline of 4.13% from that at the beginning of this year, while imported iron ore price stood at $134.30/t down 1.49% from that at the beginning of 2012. The decline in iron ore price is much less than that the decline in the steel price in the same period.

Steel prices in China are likely to remain low for the foreseeable future amid as the central government seems to still be hesitating with the much expected renewed stimuli packages.

Due to the weakening demand and sharp decline in steel prices, some domestic steel mills have suspended production and started maintenance programmes which slows down the closure of steel capacity.

Despite this, daily output of crude steel in the domestic market is still high, and is estimated to stand at 1.9705Mt during June 11-20, down 1.4% from the previous 10 days, according to CISA. In this period, daily output of companies which are members of CISA stood at 1.655Mt, down 1.7% from the preceding 10 days.

Source: China Metals e-mail infochn@public.bta.net.cn