(Yicai Global) Aug. 1 -- The Chinese commodity futures market has seen a continued increase in the prices of iron ore, coke, coking coal, hot rolled steel, rebar and other steel-related products, suggesting that the country's steel sector may be recovering.
The industry, which struggled to attract investors just two years ago, is now producing returns for shareholders. Profits at major steel makers for the first five months of this year have already surpassed last year's full-year profits.
The earnings rebound in the steel industry is unexpected, insiders told Yicai Global.
"I don't believe anybody expected this," said Li Xinchuang, head of the China Metallurgical Industry Planning and Research Institute. "The steel industry has staged a turnaround and is now profitable, rather than the industry that investors were unwilling to enter just two years ago."
The ferrous metal smelting and rolling industry saw revenues of CNY3 trillion (USD450 billion) in the first five months this year, up 23.3% from a year ago, and posted profits of CNY105 billion, up 93.5% annually, National Bureau of Statistics (NBS) data show.
Earnings growth is even faster at large- and medium-sized steel companies with profits at major steel makers reaching CNY37.9 billion in the first five months, higher than their full-year profits of CNY33.15 billion last year.
Severe oversupply in the steel sector, which had pushed prices down, no longer exists, Yicai Global learned at a recent China Iron and Steel Industry Association meeting.
Some places have reported a tightening supply of products such as steel billets and rebar, leading to a sharp increase in steel prices.
The steel industry will remain profitable in the second half of this year, said Xu Zhixin, finance director at Jiangxi Fangda Steel Group Co.
Despite a cooling property market, steel demand will continue to increase steadily and market fundamentals will keep improving, driven by public-private partnership projects, key construction projects and infrastructure investment, Wang Guoqing, director at Lange Steel Information Research Center, told Yicai Global.
As the market rebounds, steel inventories have increased, with inventories at steel mills up 7.18% last month. Overall, steel inventories remain low by historical standards, said Chen Kexin, an analyst from Lange Steel Information Research Center.
Rising inventories reflect growing confidence among market participants as they replenish and even hoard inventories. Low inventory levels are unlikely to weigh heavily on the steel market in the second half of the year.
Debt-to-asset ratios at steel companies remain high despite a substantial pickup in business operations. Although profits have increased significantly, steel companies still face challenges including heavy debts and interest payments, said Xu Xiangchun, director at Shanghai Ganglian E-Commerce Holdings Co. [SHE:300226], an IT service provider to the steel industry.
The ferrous metal smelting and rolling industry had a debt-to-asset ratio of 66.63% as of May this year, down just 0.7 percentage point from a year ago, NBS data show. The industry's overall liabilities reached CNY4.3 trillion, up 3.0% annually.