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Wuhan Iron warns of profits declining by half

By Zhang Qi (China Daily)
Updated: 2009-10-27 08:38

Wuhan Iron and Steel Corp, the listed unit of China's third-biggest steelmaker, said full-year profit may drop more than 50 percent compared to that of 2008, as the global economy hasn't substantially recovered and the steel market outlook remains uncertain.

The company reported a third quarter net profit of 546.6 million yuan, down 76 percent from 2.26 billion yuan a year earlier due to weak market demand and low sale prices, according to the statement.

Sales fell 33 percent to 13.9 billion yuan in the third quarter from a year earlier.

The decline in profits was due to a significant price drop in its oriented silicon steel products, which was a result of a technology breakthrough from competitors that trumped its monopoly in these products, according to industry insiders.

The sluggish performance was also in line with the whole steel industry situation, the sources said.

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"Overcapacity in the steel sector has weighed on prices, and squeezed most steel mills' profits," said Hu Kai, an analyst with Umetal. "But steel mills remain reluctant to curb production despite low profits."

Steel prices in China averaged 3,891 yuan a ton in the third quarter of this year, down 30 percent from 5,530 yuan compared to the same period a year earlier.

China only needs 500 million tons of steel products every year, while its steel capacity touched 660 million tons by the end of 2008, according to the official data.

The central government said last Monday that it would curb the expansion of six sectors, including steel, by withholding approval for new investment and by tightening financing.

Chinese steel mills wanting to battle for market share have reluctantly curbed production despite the government warning of oversupply.

The country's output has far exceeded demand in recent months, forcing major steel mills to cut prices nearly 25 percent since early August.

Wuhan Iron and Steel cut the November price for its major steel products by up to 400 yuan per ton from the October tags, after China's largest steel maker Baosteel cut prices for its major steel products by 13 percent for November.

The cutbacks might kick off slowly, as most steel mills will only be forced to curb production after the price of steel products drop below cost, said Han Weidong, deputy chief of marketing at Hebei Iron and Steel Group.

Although steel mills haven't made cutbacks yet, steelmakers are likely to start reducing production next year considering 2010's overcapacity situation, he said.