(Yicai Global) Aug. 18 -- China’s iron and steelmakers reported lower profits for the first half of the year as raw material costs climbed while product prices fell.

Total net profit slumped 36 percent from a year earlier to CNY68.7 billion (USD9.9 billion) in the six months ended June 30, according to the China Iron and Steel Association. The average profit on sales was just 3.29 percent, down 1.93 percentage points.

The industry is now calling on the government to further strengthen oversight to avert a reemergence of overcapacity that eats into earnings.

“To prevent a new round of overcapacity is urgent,” Wu Wenzhang, founder and president of steel industry analytics firm Shanghai SteelHome Information Technology, said at a recent industrial strategy meeting.

Profits at listed companies such as Angang Steel, Hunan Valin Steel, Liuzhou Iron & Steel, Lingyuan Iron & Steel and Beijing Shougang were reported or projected to have fallen by at least 31 percent during the period. Angang and Lingyuan warned of a more than 60 percent drop.

Steel prices hovered at low levels throughout the six months. China's index for the alloy dropped 7.7 percent to average 101 points, CISA data show. Though inventory fell 38 percent to 25.78 million tons in late June -- after the epidemic eased and downstream demand gradually recovered -- from a peak of 41.62 million in early March, crude steel and steel output still rose 1.4 percent and 2.7 percent from a year earlier.

The price of iron ore imports has also been steadily increasing. The average for 62 percent-grade fine ore reached USD100.77 a ton in June in a 10 percent rise over May, according to data from the General Administration of Customs.

Excess Capacity Cuts

Even as China promoted capacity reduction and ramped up supervision of environmental protection, the steel industry delivered its best performance ever in 2018. With growing investment in steel projects, production gained 1.4 percent in the first half despite weak downstream demand.

The government must tighten supervision and inspection of steel capacity replacement projects, raise penalties for illegal construction, expansion and new capacity, and ensure the removal of all equipment involved in the replaced capacity, according to Shen Bin, president of the China Iron and Steel Association.

Capacity replacement refers to a policy the Ministry of Industry and Information Technology issued in 2017, which mandates that if steelmakers apply to raise production they dismantle large-scale outdated mills in accordance with a set replacement ratio to maintain stable overall production capacity.

China is formulating a new version of the rules to close loopholes in earlier policies, Yicai Global learned at the strategy meeting.

Some areas are taking advantage of the investment stabilization policy amid the Covid-19 pandemic and are introducing steel projects in an outmoded extensive expansion model, which has caused steel prices and industry efficiency to decline.

Editors: Tang Shihua, Ben Armour