Steel companies pin hopes on autos

Advanced manufacturing may help firms circumvent falling margins

If the lottery system allowing people to purchase automobiles in first-tier cities was expanded to all major cities across the country, it would be a big damper for the country's steel industry.

China's steel industry has been suffering from overcapacity and declining demand this year, while major producers have increasingly focused on the automobile market, which can bring higher profits.

However, with an economic slowdown and the lottery policy, steel products for automobiles have been declining this year, said Zhang Tieshan, an analyst from steel information provider Mysteel.com.

"The sales of heavy machinery vehicles have declined more dramatically than the sales of cars because of macroeconomic conditions," he said.

Steel is the key material for automobile manufacturing. It takes up about 85 percent of all materials for a heavy-duty vehicle and about 64 percent for a family car.

Therefore, the sales of such steel products are closely related to the automobile market, Zhang said.

Chinese automobile output clocked 40 to 50 percent annual growth in 2009, a boom for both the auto market and related steel producers.

"However, the opportunity has gone and a similar situation will never happen again since China started to control automobile purchases two years ago," said Zhang.

For the first 11 months, China's automobile sales were about 17.5 million units, up only 4 percent year-on-year, according to the China Association of Automobile Manufacturers.

Since late 2010, customers in Beijing have to apply for a government-operated draw for a license plate before purchasing a car. The municipal government allows 20,000 new plates a month, about one out of 70 who apply.

Other big cities such as Shanghai carried out similar policies to reduce carbon emissions and encourage green transportation.

"The economic slowdown and political disputes between China and Japan starting from late September have added to the negative impacts on the market," Zhang said.

He said companies producing steel products for exports are influenced less by domestic factors.

Despite the declining trend this year, analysts said the market for automobile-use steel products still brings higher profits compared with the crude steel refining business, attracting many Chinese producers to join the competition.

"It's proof of the advanced manufacturing technology by producing high-end steel products for automobile use," said Hu Yanping, a steel analyst with Umetal.com. "Plus Baoshan Iron & Steel Co, the country's largest public steel maker, has had a great performance in the sector, which motivates many other major players to copy its strategy."

The company has produced more than 44 million tons of steel sheets for China's automobile manufacturing industry in the past 20 years, according to Umetal.com.

With a current annual output of about 3 million tons of steel sheets for automobile use, Baosteel dominates more than half of the domestic market, according to Hu.

Common-use steel sheet products for electronic appliances cost about 4,400 yuan ($698) a ton, while the ones for automobiles are priced at about 5,300 yuan, she said.