The steel industry is primarily engaged in industrial production activities such as mining and beneficiation of ferrous metal minerals, as well as smelting and processing of ferrous metals. It encompasses various sub-sectors including mining and beneficiation of minerals such as iron, chromium, and manganese, ironmaking, steelmaking, steel processing, ferroalloy smelting, and steel wire and its products. It stands as one of the crucial raw material industries in the country. Furthermore, since steel production also involves other industrial categories such as mining and beneficiation of non-ferrous metal minerals and their products, including coking, refractory materials, and carbon products, these industrial categories are often also included within the scope of the steel industry.
According to the operational status of the steel industry released by the China Iron and Steel Industry Association, from January to September 2013, large and medium-sized steel enterprises achieved a cumulative decline of 6.49% in sales revenue compared to the same period last year. The loss incurred by loss-making enterprises amounted to RMB 26.726 billion, a year-on-year increase of 41.5 times, with a loss coverage reaching 45%. The losses in the steel industry continue to intensify.
According to data from the China Iron and Steel Association, from January to September 2013, China’s apparent consumption of crude steel amounted to 510.2761 million tons, with a year-on-year growth rate falling by 9.73 percentage points. Among the major steel-using industries, investment in railway construction and real estate (new construction) development both experienced negative growth. The total industrial output value (product output) of the machinery, automobile, and home appliance industries showed weak growth or a significant decline in growth rate. There was no significant change in the sluggish demand for steel products. Meanwhile, steel prices remained low, while raw material and fuel prices fluctuated at high levels, significantly compressing corporate profit margins.
At present, China is in the middle and late stages of industrialization development, with a huge demand for steel and a significant market potential for the steel industry. As shown in the figure below, from 2007 to the first half of 2011, both the assets and sales scale of China’s steel industry showed a steady growth trend. In the first half of 2011, the cumulative asset scale of China’s steel industry reached 4.864 trillion yuan, an increase of 16.41% year-on-year; the cumulative sales revenue reached 3.270379 trillion yuan, an increase of 28.96% year-on-year.
On the one hand, the scale of China’s steel demand continues to expand, while on the other hand, Chinese steel enterprises are generally operating at a marginal profit level. The main reasons for the decline in the average profit margin of the steel industry are overcapacity in steel production and rising ore prices.
On March 23, 2010, BHP Billiton and Japanese steel mills reached a quarterly pricing agreement, abolishing the long-standing agreement model that had been in place for 40 years. Chinese steel enterprises were forced to accept pricing models such as quarterly pricing, monthly pricing, and spot pricing, and iron ore prices continued to rise. In 2010, the three major mines achieved a net profit of $48 billion, which was 3.5 times the profitability of China’s steel industry.
In the first half of 2011, BHP Billiton, Vale, and Rio Tinto announced their performance, showing that the three companies achieved net profits of $13.1 billion, $13.3 billion, and $7.6 billion respectively, once again reaping a bountiful harvest. However, according to data from the National Bureau of Statistics, the Chinese steel industry only achieved profits of 80.5 billion yuan in the first half of 2011. The former is nearly three times the latter. Due to the rise in iron ore prices, Chinese steel enterprises incurred an additional cost of $16.017 billion for importing iron ore in the first half of 2011. Chinese steel enterprises need to accelerate their steps to break free from the constraints of iron ore. Steel enterprises need to accelerate their extension into upstream fields and increase their efforts in overseas mining development. In this regard, enterprises such as Wuhan Iron and Steel and Baosteel have achieved good results.
China’s steel production capacity is excess, and the industrial structure is irrational, which are also the main reasons for the meager profits in the steel industry. During the “Twelfth Five-Year Plan” period, the steel industry will eliminate 75 million tons of backward ironmaking capacity and 48 million tons of backward steelmaking capacity. At the same time, the reorganization and integration of steel enterprises within the region have been upgraded again, and regional steel groups have been formed in Hebei, Shandong, Guangdong, Liaoning and other regions.
Experts predict that by 2014, the severe shortage of iron ore in China will be alleviated, and by then, the mergers and acquisitions of steel enterprises will also come to an end. It is expected that by the end of the “Twelfth Five-Year Plan”, the profitability of China’s steel industry will rebound as a whole.