Among older Chinese there is a traditional view that only a few special birthdays should be celebrated. The most important is the 60th because everything starts anew after a 60-year cycle (the belief combines the 12 zodiacs with the five elements).
The Year of the Pig 60 years ago saw Mao Zedong set targets for 30 million tonnes of steel production in 1959 (in front of a visiting Nikita Khrushchev, see WiC74). “It is not good for us to name ourselves as the most superior in the world,” he had argued the year before, “but it is not bad to become the number one steel producer.”
After the disastrous Great Leap Forward led to widespread famine, the government ditched its farfetched plan to boost output with homemade furnaces in favour of a more methodical scheme to foster steelmaking giants.
The country’s mills achieved another of Mao’s targets of surpassing the United States in steel production long ago. But sixty years on, 2019 looks to be another pivotal year for the steelmakers in a sector that has been plagued by surplus capacity, a recurring topic in WiC’s coverage over the last ten years (see WiC319, for instance).
Is the industry getting closer to sustainable profits? Total output grew 6.6% to a record 928 million tonnes last year, according to the National Development and Reform Commission (NDRC). Steelmakers made a combined profit of Rmb470 billion ($70 billion), the NDRC said this week, almost 40% up on 2017.
Some of the largest steelmakers have been posting strong earnings. Angang Steel said last month that it expected the group’s total profits to climb 58% year-on-year to a record level of Rmb10 billion in 2018.
Maanshan Iron and Steel, another Hong Kong-listed steelmaker, produced its own “positive profit alert” a week later, predicting that its profits would climb 43% to nearly Rmb6 billion for the same period.
Both Angang and Maanshan attributed their earnings growth to so-called ‘supply-side reforms’, a policy adopted by the State Council since 2015 for state-owned firms to improve their bottom lines by improving their competitiveness, rather than relying on ‘demand-side’ stimulus such as state investment that soaks up excess capacity.
A closer look at the steelmakers’ financial statements suggests a little less progress in cutting costs, however. Take Angang. Its operating costs climbed 11% to nearly Rmb70 billion for the nine months ended September last year. The key driver for its earnings growth came from the topline – i.e. an 18% increase in revenues.
For the bigger players that sales growth is mainly due to the central government’s campaign to cut back on sector overcapacity. After sustained efforts to shut down lossmaking ‘zombie SOEs’, merge regional steelmaking rivals and cap the number of new mills that are opening, the NDRC was able to report that sectorwide overcapacity had been reduced by more than 115 million tonnes last month.
The State Council’s target – cutting up to 150 million tonnes of potential output by 2020 – is on track.
So should investors put the best of the steelmakers back on their radars? Expected profit growth at Maanshan would value it at a paltry three times earnings and Angang is trading on a low single-digit price-to-earnings multiple too.
Much of the sector’s prospects hinge on how the bigger firms can find further efficiencies in production. And for some of the stronger steelmakers, the clampdown on excess capacity at home is also forcing them to look outside the country for growth. Hebei Iron & Steel (HBIS), for one, announced last month that it is buying Tata Steel’s southeast Asia unit headquartered in Singapore for about $327 million in a deal that would add 3.7 million tonnes of production capacity a year.
It came just a month after HBIS signed a preliminary agreement on a $4.4 billion iron and steel project in the Philippines with more than 8 million tonnes of annual capacity.
Bigger is still better as far as most of the Chinese steelmakers are concerned. HBIS has about 50 million tonnes of annual capacity, and the purchases will take it past Japan’s Nippon Steel & Sumitomo Metal Corp to become the world’s third-largest steelmaker, according to data from the World Steel Association’s website.
© ChinTell Ltd. All rights reserved.
Sponsored by HSBC.
The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.