Profit growth in China's steel sector, the biggest in the world, is forecast to slow sharply this year after a blistering pace in the first quarter.

 

The nation's top 99 steel companies reported a combined profit of 34.53 billion yuan in the first three months, rocketing by 282 percent from a year earlier, according to data from China Iron and Steel Association.

 

Luo Bingsheng, the industry body's vice-chairman, said the profit rise mainly resulted from a "very weak" first quarter in 2006 and could not be maintained in the rest of the year.

 

"We expect full-year profits to grow at a normal and reasonable rate," Luo said, without providing a figure.

 

Echoing Luo, Sun Yong, a steel analyst from China Galaxy Securities Co Ltd, predicted the sector's 2007 profits will climb by 30-40 percent from last year.

 

Profits of more than 20 main listed steel makers in China tripled in the first quarter from the same period last year, said Sun.

 

He also attributed the sensational January-March profit growth to a big jump in steel exports and higher prices in foreign markets.

 

China's exports of finished steel products reached 14.1 million tons in the period, up 125.3 percent year-on-year.

 

At the end of March, the international comprehensive steel price index stood at 160.7 points, compared with 109.8 points in China.

 

However, he said, exports in the second half of this year will decelerate because of the government's control measures, which are expected put a break on profit growth.

 

China has just levied 5-10 percent export tariffs on 82 categories of steel products and lifted tariffs on another 19 categories to 15 percent from 10 percent.

 

This step followed a similar one in April, when the government cut export tax rebates on 76 categories of steel products to 5 percent from 8-11 percent and completely removed tax rebates on another 83 categories.

 

As a result of these measures, the steel association said, steel exports for the full year will just equal or even be lower than last year. In 2006, China exported 43 million tons of finished steel products.

 

Zhou Xizeng, from CITIC Securities Co Ltd, said the steel sector will post steady profit growth this year, though not as fast as in the first quarter, because steel prices are on the up in the domestic market.

 

Zhou predicted the sector's 2007 profits will climb 30 percent. "Domestic steel prices are buttressed by strong demand from many steel-consuming sectors, such as autos, real estate and shipbuilding."

 

In the first quarter of this year, crude steel demand in China climbed by 12.5 percent year-on-year to 102.6 million tons.

 

The government is slashing outmoded steel production capacity, which, Zhou said, will offset the negative impact on prices from the expected slowdown in steel exports in the second half.

 

According to a government plan announced earlier this year, 35 million tons of outmoded production capacity will be removed this year to prevent a market glut and save resources.

 

The total steel production capacity in China stood at almost 500 million tons last year.

 

In the first three months of this year, crude steel production rose by 22.3 percent to 114.7 million tons.

 

The steel association predicted earlier that full-year production will reach 462 million to 475 million tons, up from 418.8 million tons in 2006. Moreover, analysts said, rising costs will boost steel prices in the country.

 

In January, China's top steel maker Baosteel, representing over 100 steel mills in the nation, made an agreement with CVRD, BHP Billiton and Rio Tinto - world's three largest iron ore providers - on a 9.5 percent rise in ore prices for 2007.

 

China imported 100.2 million tons of ore in the first three months of this year, up 23.1 percent year-on-year. Prices of other raw materials, such as coal, water and power, have also been rising in China.

 

(China Daily June 7, 2007)