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Costs Rise, Price Fall Threaten Steel Profits
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China's steel industry may lose money or post only a small profit this year due to high raw material costs and low product prices, the National Development and Reform Commission (NDRC) warned yesterday.


Last year, the industry posted 127.4 billion yuan (US$15.8 billion) in profit, less than a 1 percent rise from the year before - and 78 percentage points below the growth rate from 2003 to 2004.


"Rapid growth in 2003 and 2004 produced more production capacity than the market could digest and led to last year's stagnant performance," said market observer Li Li of the Steel Business Briefing, an industry journal.


Sales stood at 2.37 trillion yuan in 2005, with half of the total contributed by key manufacturers such as Baosteel Group Corp and Wuhan Iron & Steel Group.


The number of unprofitable mills rose 35 percent last year after the sector began experiencing losses in September, the planning agency said.


"The loss-making companies were mainly some of the smaller firms, and they will pay the price of industry consolidation," said Wang Zhixiang, a Xiangcai Securities Co analyst.


"The trend is that the big guys will get bigger, and the small players will become less competitive."


Excess supply drove down steel prices 32 percent between early April and the end of last year, according to the composite steel product price index compiled by the China Iron and Steel Association.


Steelmakers are now trying to wring concessions out of raw material companies. Chinese mills are in talks with iron ore suppliers - including Brazil's Companhia Vale do Rio Doce and Australia's BHP Billiton Ltd and Rio Tinto Group - on contract prices for the next 12 months. Last year, those prices surged 71.5 percent.


In a separate statement, the economic planner said results in the nonferrous industry reached an "all-time high" last year, and progress has been achieved in curbing excess investment in sectors such as electrolytic aluminum production.


Nonferrous metal mining, processing and smelting companies reported combined revenues of 878.4 billion yuan, up 36.4 percent from a year before. Profit rose 53.6 percent to 61.9 billion yuan.


The planner pointed out, however, that excess investment in copper smelters will continue to affect profits.


The nation's annual copper smelting capacity is forecast to reach 3.7 million metric tons in 2007, "far above" the copper supply ability of domestic mines and imports, authorities said.


(Shanghai Daily March 2, 2006)


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