The combined profits of China's major steel producers dropped more than 94 percent year-on-year to 2.53 billion yuan ($398.39 million) in the first five months this year, amid sluggish demand as well as severe overcapacity in the sector, the Economic Information Daily reported Monday, citing statistics from an industry association.
In May, the combined profits of the 77 steel mills surveyed by the China Iron and Steel Association (CISA) slid 21.7 percent month-on-month to 1.4 billion yuan, according to the report, even though the second quarter is supposed to be a peak season for the industry. Also in May, over 30 percent of companies in the sector suffered losses.
"The steel market was weaker than expected in April and May. Plus, production capacity in the sector still far exceeds current domestic demand," Qu Xiuli, deputy secretary-general at the CISA, told the Global Times on Monday.
Leading steel producers such as Baosteel Group, Anshan Iron and Steel Group and Wuhan Iron and Steel Group have cut the July factory prices of their products by about 200 yuan per ton. Current steel prices have dropped around 800 yuan per ton compared with the same period in 2011.
High costs of labor and raw materials have also affected steel mills' profits, according to Qu. "Even though iron ore and coking coal prices have showed a moderate decline since April, it is still not enough to cover the losses incurred by the price drop of steel products."
Currently most large- and middle-sized steel mills are cutting production to avoid further losses, but Qu noted that some small mills are still enlarging their production despite the current gloomy market.
Production of the member companies of the CISA was down by 0.6 percent in the first five months this year, while that of small mills increased by 18.5 percent during the same period, according to statistics from the CISA.
The production index for the steel sector fell 3.6 percentage points to 50.3 percent in June, according to statistics from the China Federation of Logistics & Purchasing. The fall in the index, indicating shrinking industrial activity in the sector, means that the pressure of overcapacity in the sector may be easing.
But experts said that the industry is not likely to see an upturn any time soon. "Profits in the steel industry will continue to be dampened by the slowing economy," Wang Guoqing, a senior analyst with Beijing Lange Steel Information Research Center, told the Global Times Monday.
Wang noted that given the government's tightening policies on the real estate sector, which consumes some 30 percent of total domestic steel production, no significant increase in steel demand will be seen in the near future.
"In addition, construction will be further affected by the heat in summer and the torrential rain in some places," Wang said, noting that steel demand is unlikely to pick up in the third quarter.