Global Steel Market Is Put on Notice as Top China Mill Warns

(Bloomberg) -- The top steel mill in China has issued a one-two warning about the outlook, saying it sees the twin risks of slowing demand and rising output in the country that accounts for half of global production. The shares sank.

Contraction in industries including property and autos will slow consumption this year, although infrastructure remains relatively robust, Baoshan Iron & Steel Co. said in a statement as it reported record profit for 2018. Exports are set to drop amid global trade frictions while supply may expand, said the listed unit of China’s biggest steelmaker, China Baowu Steel Group.

The mainland steel market sets the tone for conditions in the industry worldwide, with trends in demand, supply, pricing and exports carrying implications for mills around the globe. The downbeat outlook from Baosteel contrasts with a run of positive signals from Asia’s biggest economy as first-quarter growth topped expectations, steel prices rebounded and mills’ profitability improved. Still, it follows a surge in the cost of iron ore -- used to make steel -- which has rallied to mutliyear highs on a supply squeeze.

The shift in the mill’s outlook was captured in its earnings figures. While profit for 2018 hit a record 21.6 billion yuan ($3.2 billion) -- with earnings of about 5 billion yuan each quarter -- net income in the first quarter of 2019 fell to 2.73 billion yuan, down 46 percent, the mill said in a second statement.

Huge Challenge

The slump in Baosteel’s first-quarter earnings isn’t surprising as elevated costs, including iron ore, pose a huge challenge, according to Helen Lau, an analyst with Argonaut Securities (Asia) Ltd. Steelmakers couldn’t pass on the higher costs due to the weakening macro economic situation, she said.

Baosteel shares ended 4.4 percent lower in Shanghai on Thursday, putting them on track for the biggest weekly drop since mid-2018. Over the past year, the stock is 22 percent lower, although it remains higher year-to-date.

Full-year sales of steel products are expected to drop to 46.8 million tons in 2019 compared with 47.1 million tons in 2018, while revenue slides to 273.1 billion yuan from 305.2 billion, Shanghai-based Baosteel said.

The mill also cited weakness in autos among drivers of slowing consumption in 2019. China’s auto market shrank for the first time in almost three decades last year as the economy slowed and the trade war with the U.S. hurt spending.

Nationwide steel supply faces pressure to increase as new facilities gradually come on line under a swap-program with idled capacity, the producer said. China churned out 231 million tons between January and March, up almost 10 percent from a year earlier and the highest for any first quarter on record.

--With assistance from Martin Ritchie.

To contact Bloomberg News staff for this story: Winnie Zhu in Shanghai at wzhu4@bloomberg.net

To contact the editors responsible for this story: Phoebe Sedgman at psedgman2@bloomberg.net, Jake Lloyd-Smith

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With assistance from Bloomberg