During the first half of 2007, the profits of most of China's steel corporations doubled compared to the same period of the previous year. According to the China Iron & Steel Association (CISA) data, just taking China's 77 large- and medium-sized steel corporations into account, their total profits amounted to RMB 78.3 billion (USD 10.2 billion) for the period in question, up 108.75 percent year on year. The average gross and net profit margins were 22.15 and 8.51 percent respectively.
Analysis of China's listed steel corporations indicates that up to August 2007 the average gross profit margin ratio of the major steel product categories has been within the range of 13-20 percent over the past 12 months. Among these categories, CR, strip, rebar and high speed wire rod all have a similar gross profit margin ratio of 10-14 percent. The one outstanding category is HR, with an average gross profit margin ratio of 20 percent. This means that it is better for the mills to produce and sell HR rather than CR despite the latter's higher added value.
The gross profit margin ratio ranges of the above mentioned steel products of all listed Chinese steel corporations are listed as follows - Rebar: 1-16 percent, average 10 percent; CR: 6-29 percent, average 13 percent; strip: 13-15 percent, average 14 percent; high speed wire rod: 10-20 percent, average 14 percent; HR: 14-28 percent, average 20 percent.
Currently, the whole steel industry in China is facing the stress of a rise in costs. During the first half of 2007, the cost of pig iron rose 8.34 percent year on year, thanks to the price hike in raw material and fuel. It is estimated that the price hike in iron ore alone was responsible for a rise of nearly RMB 20 billion (US$2.6 billion) in the overall domestic industry's production costs.
In the 2nd half of 2007, it appears unlikely that the local market will see a continuous and steady price hike for steel products. Baosteel's new price policy has given an indication of the worries of some of the big steelmakers. However, the general rising tendency as regards costs seems destined to continue for the rest of 2007.
The price hike tendency in iron ore is a fact. In mid-July, the world's top three iron ore suppliers have announced that they will reduce their output by at least five million tons during July and September. This message has pushed many of China's steel mills to increase ore imports and up their spot price of iron ore. Just at the end of July, the CIF price of iron ore of 63.5 percent quality reached US$115/mt, up 12 percent compared to the beginning of the same month.
The rise in shipping costs has also created much difficulty. The strong demand from China has contributed to the boom in the international shipping market. In August, iron ore shipping fees from Brazil to Ningbo and Shanghai even exceeded US$56/mt, thus continuing to reach new historical highs. Meanwhile, the shipping fees from Australia to Ningbo and Shanghai have reached US$22/mt with a growth rate of over 77 percent year on year.
In 2006, total Chinese steel industry profits amounted to RMB 170 billion (US$22 billion) - another historical record. This year, although the total figure is expected to surpass that of last year, a drop in the profit level ratio would seem to be inevitable.