SHANGHAI, Apr. 1 (SMM) -- Baoshan Iron & Steel (Baosteel) released the 2011 annual report recently, saying its total operating revenues were RMB 222.857 billion in 2011, up 10.1% YoY, but net profits were only RMB 7.362 billion, down 42.8% YoY. Baosteel, China's biggest listed steelmaker, posted a significant fall in its 2011 profits, also reflecting China’s steel industry secured minimal profits in 2011.

According to Steelease statistics, average profits at China’s steel mills were extremely low during February 2012. Based on current market prices for steel products and production costs, almost all steel products are unprofitable with exception of rebar and wire rod which can generate profits of RMB 7/mt and RMB 24/mt, respectively. Galvanized plate’s losses are even above RMB 500/mt. Steelease believes the profit margin at China’s steel mills will not likely improve in the short term for the following reasons.

First, China’s steel mills face overcapacity and disorderly competition. There are nearly 1,000 steel mills in China, with total steel production capacity much higher than China’s actual demand. Meanwhile, low industrial concentration, disorderly production and intense competition allow steel prices to move around the cost price level for a long term.

Second, iron ore prices rose significantly in 2011, and imported ore prices were even up by 28.2% YoY, further squeezing profit margins at steel mills. China’s dependency on imported ore shows no signs of falling, and China’s iron ore price bargaining power remains weak amid overseas iron ore suppliers’ monopoly.

Third, steel demand growth will be weaker than 2011 in the face of the slowdown of Chinese economic growth. China’s fixed asset investment grew by 21.5% YoY in the first two months of 2012, 3.4 percentage points slower than 2011. The PMI for steel downstream industries was 56.51% during March, also down 5.74% YoY.