Coated and galvanized steel plates at a Baoshan Iron and Steel Co Ltd plant in Huangshi, Hubei province. The profits of large steelmakers plunged 95.8 percent in the first half of the year amid the economic slowdown. [Photo/China Daily]?

Expert: Govt is pondering tax rebates to help steel industry

The profits of China's large and medium-sized steel companies plunged 95.8 percent year-on-year in the first half of the year, as a slowing economy curbed demand and prices were slashed, a senior industry official said on Tuesday.

The total profit of the steel industry was 2.39 billion yuan ($376 million), while the companies that were in the red reported a total loss of 14.25 billion yuan, according to the China Iron and Steel Association.

"The profitability of the industry is on the verge of becoming a deficit," said Zhang Changfu, association vice-chairman. "Production capacities are increasing in the current oversupply market while investment is growing, which will make the glut worse."

Li Xinchuang, head of the China Metallurgical Industry Planning and Research Institute, said at a news conference on Tuesday that the central government is considering restoring a value-added tax rebate on high-end steel products that are purchased from domestic steelmakers.

He said China imported about 15 million metric tons of high-end steel products annually, and half those products are purchased overseas for domestic processing companies that have duty-free imports.

"It will help increase domestic supplies and reduce imports if the new policy can be carried out," Li said. "Chinese companies can provide 7 million to 8 million tons of steel products at the most to replace imports if the plan goes well."

Since the fourth quarter of 2011, the steel industry has been battered by falling prices and rising raw material costs, which led to high domestic inventories.

In February, China had a record-high steel inventory consisting of 12.46 million tons of the metal.

In the first half, the central government continued to impose strict control policies on the real estate industry, and railway and road infrastructure construction has decreased.

"Crude steel's apparent consumption in the first six months had no increase compared with last year," Zhang said.

According to the association, China exported 21.40 million tons of crude steel in the first half, 4.36 million tons more than last year, showing an annual growth rate of 25.6 percent.

"The exports have helped ease the pressure of the supply glut in the country," Zhang said. "However, the average unit price of exported steel products is $960 a ton, while that of imported steel products is an average of $1,326 a ton."

"Chinese companies cannot continue to buy iron ore at high prices from abroad and export steel products at low prices. The export structure has to be changed."

Chinese companies should reduce their consumption of raw materials and gradually export fewer low value-added steel products. Meanwhile, they need to continue to expand overseas and try to gain more iron ore resources to diversify the country's iron ore import channels, Zhang said.

He said Chinese steel companies should control production capacities, reduce costs and make a greater effort to produce high-end steel products.

Currently, the European debt crisis has dampened overseas demand for Chinese steel products.

In 2011, China exported 5.17 million tons of steel products to 27 EU countries, showing a 33 percent growth year-on-year. But China's steel products exported to the EU in the first half this year dropped 27 percent year-on-year.

The export increase in the first half came mainly from markets in areas in the Middle East, South Africa and Africa and the United States, according to the association.

Zhang estimated the weak global market will make exports even more difficult for Chinese machinery manufacturers and steel producers in the second half of the year.

Han Weidong, senior analyst at Lange Steel Information Research Center, predicted that many steelmakers might soon go bankrupt, "which will lead to a new balance".

"However, the process will take time," Han said.

He predicted that some large steelmakers will soon reduce their output, which could benefit the domestic market.

"It is still possible to get better in August or September because supportive policies will continue," he said.

dujuan@chinadaily.com.cn