Steel sector still facing profitability problems

A worker checks stainless-steel cable at a base in Dalian, Liaoning province. The growth rate for steel demand will fall from 6.3 percent in 2013 to 3.2 percent next year. Liu Debin / for China Daily

Chinese steelmakers' profits will remain low next year as output remains high and demand growth slows, said industry experts.

The ratings agency Moody's Investors Service said on Wednesday that its outlook for the Asian steel and coal sectors is negative for 2014.

According to its just-released report 2014 Outlook - Asian Steel and Coal, Oversupply and Weak Prices Drive Negative Outlooks - demand for steel will increase a modest 2 to 3 percent next year as the Chinese government tolerates slower gross domestic product growth and shifts economic growth drivers to domestic consumptionfrom infrastructure spending.

"The Chinese government's push to cut inefficient steel capacity will be credit positive for most large steel producers in the region. However, uncertainties remain as to the timing and the scale of the capacity cuts," said the report.

The severe overcapacity problem has been the biggest obstacle for China's steel industry, which has affected steelmakers' profits in the past few years.

The China Iron and SteelAssociation predicts that the steel industry's profits in 2014 will reach 21 billion yuan ($3.44 billion), 12 times as much as the industry's profits last year.

However, Xu Xiangchun, information director of industrial information consultancy Mysteel, said the dramatic growth of the profit will be caused by the extremely low base in 2012.

China's steel industry had a total profit of 1.58 billion yuan in 2012, a 98.22 percent year-on-year drop, caused by rising iron ore prices and a weak market.

Li Xinchuang, head of the China Metallurgical Industry Planning and Research Institute, said most steel companies suffered severe losses last year.

"Therefore, the profit growth based on last year's losses is not meaningful for the whole industry," he said. "In addition, many steel companies are making profits from their non-steel businesses. If China's steel output and capacity cannot be effectively reduced, the companies cannot realize real profit growth."