High Iron Ore Prices Erode Steelmaker Profits

Chinese steelmaker profits plunged in the third quarter, hit by soaring costs of iron ore due to falling global supplies of the main ingredient used in steelmaking.

Angang Steel Co. Ltd.’s net profit fell 87.7% to 297 million yuan ($42.2 million) in the three months from July to September, while Inner Mongolia Baotou Steel Union Co. Ltd.’s profit fell 83.4% to 147.4 million yuan, according to company filings on Wednesday. Baoshan Iron & Steel Co., the Shanghai-listed arm of China’s biggest state-owned steel producer Baowu Steel Group Corp., on Saturday reported its profit fell 53.1% to 2.7 billion yuan for the quarter.

On a broader basis, the more than 350 members of the China Iron & Steel Association (CISA) saw their combined profits fall 32% to 1.4 trillion yuan during the first three quarters this year, the industry group said (link in Chinese) in a press conference in Beijing on Tuesday. The companies’ third-quarter profits fell nearly 40% to 401 billion yuan, according to Caixin’s calculations.

The companies were hit by rising costs of iron ore due to shrinking supplies from the global mining hubs of Australia and Brazil, the industry group said. Brazil’s Vale SA, one of the world’s largest iron ore exporters, reported its third-quarter production fell by 17.4% from a year ago, following a deadly dam collapse that forced it to suspended production at some of its mines in late January. In Australia, miners also slashed output following hurricane and fire damage in March.

The supply crunch lifted iron ore futures in China to a four-year high over the summer. In July, the Dalian-traded contract for iron ore due for delivery in September reached 909 yuan per ton, marking the first close above the 900 yuan threshold since early 2014.

But the price has already begun to move lower due to weakening demand in China amid the cooling economy, said He Wenbo, executive vice-president of CISA. The price of China’s imported iron ore fell by 6.4% month-on-month in October, following a drop of 7.8% in September, official data showed.

China produces more than half of the world’s steel, which is used in everything from house construction to making cars.

Demand could continue to fall as Beijing winds down its industry consolidation campaign of the last few years, resulting in further elimination of capacity as companies combine, said He. But as that campaign wraps up, output has begun to stabilize, which in turn is helping to drive up steel prices.

China’s overall production of steel products rose 8.4% to 749 million tons in the first three quarter of this year, according to CISA. The growth is expected to slow to 7.1% for the full year, said He.

Contact reporter Tang Ziyi (ziyitang@caixin.com)