the world of steel─鋼鐵的世界 - 6 september 2011 china prices … · 2011. 9. 6. · steel...

the average operating profit margin of China’s steel

mills last year was just 3%. This operating margin in-

cludes not only finance costs, but also depreciation,

which is not a cash flow. When we remove the effects

of depreciation, we discover that Chinese mills’ free

cash flow is better than would first appear.

A further look at mill

profitability

In Profile: Xinxing Ductile Iron Pipe 8

Smaller increases in depreciation for other

Asian mills

Mill profitability is reduced due to high de-

preciation across the sector

4

Week in review: Iron ore prices back over

$180/t as mills report lower profits

3

5

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China Prices

RMB/t

Prices taken from www.steelbb.com/steelpriceslist/ www.thesteelindex.com

$/t

Steel prices include 17% VAT

6 September 2011

The Steel Index’s (TSI) 62% Fe iron ore reference price

last week climbed above $180/t cfr China for the first

time since early May. The rise in iron prices comes just

as mills, such as Baoshan Iron & Steel, are starting to

report lower earnings for Q2.

Compared with the average Chinese mill, other major

Asian steel mills saw much smaller increases in depre-

ciation charges. This is in part due to the very different

operating conditions outside China.

Published since 2005 by SBB Shanghai

Issue #219

w/e 2 Sep w-o-w

change (RMB)

w-o-w change

(%)

HRC RMB/t 4,775 0 0.00%

CRC RMB/t 5,395 0 0.00%

Rebar RMB/t 4,745 -10 -0.21%

Rebar-1 month forward

RMB/t 4,705 -229 -4.64%

Rebar-3 month forward

RMB/t 4,899 72 1.5%

Seamless pipe RMB/t 5,850 25 0.4%

Welded pipe RMB/t 5,150 25 0.5%

TSI 62% Fe Fines ($/t, CFR China)

$/t 181 2 1.3%

Capesize Iron Ore W. Australia - China

$/t 10.77 1.44 15.4%

125

150

175

200

Sep 10 Nov 10 Jan 11 Apr 11 Jun 11 Aug 11

Iron ore fines 62% Fe CFR China

3750

4000

4250

4500

4750

5000

Sep 10 Nov 10 Jan 11 Apr 11 Jun 11 Aug 11

Rebar

HRC

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Last week’s industry news

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C h o n g q i n g

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Subscriber Edition 13 January 2011

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Shanghai Municipality Baosteel Baosteel will boost its grain-oriented silicon steel capacity from its current 100,000 t/y to 300,000 t/y by 2013. In addition, during the same period Baosteel will add an extra 210,000 t/y of non-grain oriented silicon sheet capacity. Two GO silicon steel mills are currently under construction at Baosteel, each with a capacity of 100,000 t/y. The 210,000 t/y NGO silicon steel mill is scheduled to be commissioned in June 2013.


6 September 2011

Shandong Province Xingda Steel Tyre Cord Hong Kong-listed Xingda International Holding Limited, one of China’s largest tyre cord makers, expects to boost its capacity to about 700,000 t/y of tyre cord by 2013. The company will add 50,000 t/y of tyre cord capacity in 2012 and another 50,000 t/y in 2013. Xingda will also meet its 700,000 t/y capacity target by conducting simultaneous expansion at its No.9 plant at its main production facilities.

Shandong Province Bekaert Belgium-based global wire producer Bekaert has completed the acquisition of Chinese wire rod and wire plant Qingdao Hansun, which produces galvanised wire rod and steel rope for applications in the construction,

paper manufacturing, mining and other sectors , The plant will be renamed Bekaert (Qingdao) Wire Products.

Official inflation and housing construction data for August should hint at the extent of the summer slowdown, if indeed such a slowdown occurred.

...and the week to come

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Subscriber Edition 2 November 2010 Subscriber Edition 16 November 2010 Subscriber Edition 13 January 2011

The week in review

Iron ore prices back over $180/t as mills report lower profits

The Steel Index’s (TSI) 62% Fe iron ore reference price last week climbed

above $180/dmt cfr China for the first time since early May. Continuing tight

supplies in the seaborne iron market have been slowly pushing prices upward

for the last weeks, as it now seems unlikely any shipments from Karnataka will

happen before next year. India’s government is now also looking into imposing

similar regulations in Goa, which if implemented could even further limit

supplies of the steelmaking raw material.

The next quarter promises mills little relief from high iron ore prices. Indicative

Q4 contract prices based on TSI’s 62% Fe, 2% Al index over June-August fell

1.1% from last quarter to $168.7/dmt fob West Australia, though prices remain

near record highs. Meanwhile, iron ore port stocks rose to another record level

last week. Speculative buying on contract by Chinese mills expecting further

price rises is one of the key drivers behind the recent surge in port stocks.

The rise in iron prices comes just as mills are starting to report lower earnings

for Q2. Baoshan Iron & Steel (Baosteel) saw its Q2 net profit drop by 34.5% to

RMB 2 billion, while its net profit margin fell from 5.7% to 3.5% (see Figure 3,

next page). The mill blamed high raw material costs, which were at an all-time

record high according to TSI’s calculation (see Figure 2 above), as well as

weaker end-user demand for the fall in profits. The mill’s H1 net profit also fell

by 36.9% to RMB 5.07bn.

Baosteel’s attempts to pass on higher costs to customers in Q3 might also be

meeting some resistance. Baosteel announced three weeks ago it was raising

its HRC and CRC prices by RMB100-150/t for September delivery, a move

that was soon followed by a number of other major mills. However, flats prices

have remained mostly unchanged since the announcement, and eastern

China’s Shagang also announced last week it would keep HRC list prices for

September unchanged, citing continued weak buying at current price levels.

6 September 2011

70

75

80

85

90

95

100

07-Jan-11 07-Apr-11 07-Jul-11

Source: SXCoal, SBB Research

Figure 1. Iron ore port stocks hit new record high last week

m t

Source: The Steel Index (TSI), SBB Research

Figure 2. Q4 contract iron ore price down a bit but still near record highs

100

110

120

130

140

150

160

170

180

190

200TSI 62% Fe 2% Al fob W. Australia indicative contract price

TSI 62% Fe 2% Al fob W. Australia reference price

SBBAnalyticsChina


Subscriber Edition 2 November 2010 Subscriber Edition 16 November 2010 Subscriber Edition 13 January 2011

A further look at mill profitability

Mill profitability is reduced due to high depreciation across the sector

According to the China Iron and Steel Association (CISA), the average

operating profit margin of China’s steel mills last year was just 3%. This

operating margin includes not only finance costs, but also depreciation.

Depreciation is an accounting convention which allocates the cost of an asset

over its useful life by deducting a set percentage of the seet’s cost every year

from the profit and loss account (the income statement) of the company. Every

time a steel company invests in new capacity or upgrades its production

facilities, the new assets will be depreciated, affecting profitability as the

depreciation of these assets is deducted from the company’s income

statement.

It is important to note that depreciation, unlike raw materials, electricity or

labour, is not a cash expense and as long as it has positive cash flow, a

company can carry on operating with very low or even negative profitability if

this is solely a result of depreciation. We have thus chosen to analyze Chinese

mills’ EBITDA (earnings before interest, tax, depreciation and amortization),

which as it excludes depreciation arguably provides a better view of a

company’s free cash flow than does its reported operating profit.

6 September 2011

Source: Company reports, SBB Research

Figure 4. Chinese steel mill EBITDA / PBT comparison 2008-2010

EBITDA PBT EBITDA PBT EBITDA PBT EBITDA PBT

Wugang 17.3% 8.7% 11.9% 3.6% 11.2% 2.3% -35.3% -73.9%

Hegang 8.4% 4.3% 6.2% 1.3% 6.1% 1.4% -27.3% -66.6%

Angang 14.3% 4.8% 12.4% 1.2% 12.3% 2.6% -13.5% -47.0%

Chonggang 12.4% 3.7% 6.1% 1.0% 3.9% 0.1% -68.4% -97.7%

Baosteel 15.1% 4.1% 13.8% 4.9% 14.7% 8.4% -2.3% 107.5%

Average 13.5% 5.1% 10.1% 2.4% 9.7% 3.0% -28.4% -42.0%

Change 2010 / 20082008 2009 2010

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

3Q2009 4Q2009 1Q2010 2Q2010 3Q2010 4Q2010 1Q2011 2Q2011

Source: Reuters, SBB Research

Figure 3. Baosteel’s profitability after tax falls to 2-year low

SBBAnalyticsChina

Subscriber Edition 25 October 2010


Chinese mills have large gap between EBITDA and operating profit

Rising raw material costs, sales prices constrained by overcapacity, and lower

levels of exports have all reduced the profitability of Chinese steel mills over

the last three years. Our analysis suggests that the average EBITDA margin of

five major listed Chinese mills dropped by 28% over the period 2008-2010,

while the average profit margin before tax (PBT) fell by 42%. Mills such as

Baoshan Iron & Steel (Baosteel) and Wuhan Iron & Steel (Wugang), which

produce higher-value products, not surprisingly post higher EBITDA and PBT

margins than the other major Chinese mills we looked at.

Rising steel demand in China over the last decade led to a huge investment in

new crude and rolling capacity and an increase in the assets on steel mills’

balance sheets. Over the period 2008-2010 the average depreciation of the

five major mills we analyzed, excluding Baosteel, increased by 55%, as the

new assets on these companies balance sheets were brought into operation.

Smaller increases in depreciation for other Asian mills

Compared with the average Chinese mill, other major Asian steel mills saw

much smaller increases in depreciation charges. During the period 2008-2010,

depreciation for POSCO, South Korea’s largest steel mill, increased by just

over 20%, while that for Tata’s Indian steel operations increased by just 4%,

suggesting that the assets on their balance sheets grew at a slower pace over

the period than did Chinese mills (see Figure 5).

Asian steel mills outside China generally have higher EBITDA and PBT

margins than Chinese mills (Figure 6, next page). These margins also

remained more stable over the period 2008—2010, when Chinese mills saw

falling margins This is in part due to the very different operating conditions

outside China.

For example, Tata’s Indian steel operations have access to a captive supply of

high quality domestic iron ore and are able to exercise considerable pricing

power over the domestic market, especially for higher value products. Tata

also adds value via a network of five processing units across the country.

Subscriber Edition 2 November 2010 Subscriber Edition 16 November 2010 Subscriber Edition 13 January 2011 6 September 2011

Figure 5. Depreciation levels (indexed) rising fastest at ex-Baosteel mills


80

100

120

140

160

2008 2009 2010

TATA

POSCO

Baosteel

China ex-Baosteel

SBBAnalyticsChina



Meanwhile, POSCO produces predominantly high value-added flat products

such as cold-rolled auto sheet. The only comparable Chinese mill is Baosteel,

which even though it enjoys the highest EBITDA margin of all major listed

Chinese mills is still considerably less profitable than POSCO, which had an

EBITDA margin of 22.6% last year.

Somewhat ironically, East Asian mills such as POSCO were able to maintain

their high margins throughout the global financial crisis in large part thanks to

surging demand from China. Although Chinese mills have been moving to

producing higher value-added products, the country still remains dependent on

imports of high-quality sheet and other specialist steels. Last year, over 70% of

China’s steel imports came from Japan and Korea.

We note that differences in accounting rules and conventions vary from

country to country and this may mean that these profit margins are not directly

comparable. Nevertheless we feel confident about the trends revealed by this

analysis. Perhaps more importantly, the financial statements for the Chinese

mills are generally consolidated and include revenues from non-steel

businesses, whereas we have analyzed the non-consolidated steel businesses

for the Indian, Japanese and Korean mills.

Assets on Baosteel’s balance sheet shrunk 2008—2010

Figure 7 (next page) shows depreciation as a percentage of EBITDA (D%

EBITDA) for five major listed Chinese mills. Annual depreciation rose at a

faster rate than EBITDA at mills such as Hegang, Wugang, and Angang,

causing D%EBITDA over the period 2008-2010 to rise. D%EBITDA for all mills

spiked in 2009, due both to sharply decreased profits from the financial crisis

and rising depreciation. It fell back again somewhat in 2010 on higher mill

profits, but still settled at significantly higher levels than in 2008 for most mills.

Meanwhile, D%EBITDA for Baosteel fell over the same period, mainly due to

the fact that Baosteel’s net assets on the balance sheet fell with a

corresponding decline in depreciation. At the same time, Baosteel’s EBITDA

fell by 32% in 2009 and rose by 36% in 2010, resulting in D%EBITDA falling

from 64% in 2009 to 44% in 2010.

Subscriber Edition 2 November 2010 Subscriber Edition 16 November 2010 Subscriber Edition 13 January 2011 6 September 2011

2008 2009 2010

EBITDA PBT EBITDA PBT EBITDA PBT

TATA* 38.8% 28.1% 39.2% 28.8% 41.6% 33.3%

SAIL 21.8% 19.5% 26.2% 23.4% 20.8% 15.4%

POSCO 27.6% 19.0% 19.3% 13.3% 22.6% 15.8%

JFE 14.6% 8.5% 11.9% 2.5% 11.9% 3.6%

Average 25.7% 18.8% 24.2% 17.0% 24.2% 17.0%

Source: Company reports, SBB Research. * Indian steel company only

Figure 6. Asian steel mill EBITDA / PBT comparison 2008-2010

SBBAnalyticsChina



Conclusions

Once deprecation is removed, the free cash flow of many Chinese mills, as

represented by EBITDA, appears significantly improved as shown in Figure 4.

Although financing on any loans taken out to purchase assets will have to be

paid for out of a mill’s EBITDA, many Chinese steel mills’ free cash flows are

much better than their operating margin would suggest.

.

Subscriber Edition 2 November 2010 16 November 2010 6 September 2011


Figure 7. Share of depreciation in EBIDTA of five Chinese mills

0%

20%

40%

60%

80%

100%

2008 2009 2010

Wugang Hegang Angang Chongang Baosteel

What is the company?

Xinxing Ductile Iron Pipe (Xinxing) is a publicly listed

state-owned ductile iron pipe and integrated steelworks

located in Wu’an city in northern Hebei province.

What does it produce?

Despite its name, Xinxing produces many more products

than simply ductile iron pipes, of which it produces

around 1.5m t/y. The mill also produces around 5m t/y of

finished steel products including rebar, wire rod, alloy

special steel and steel-plastic composite pipes.

Why is it interesting?

China’s ductile iron pipe market is fairly small with

demand of around 3m t/y, of which has around 50%

market share. Ductile iron pipes, given their high

strength and natural corrosion resistance, are used for

underground water and gas pipe networks. The mill has

benefited greatly in recent years from China’s booming

construction and infrastructure projects.

Xinxing has not limited itself to just ductile iron pipe

production. The mill also produces a number of other

steel and alloy high-pressure pipes for conveying oil,

communications equipment, natural gas, chemicals and

other materials.

Xinxing recently announced a joint venture project with

Sichuan-based Sanzhou Special Pipe (Sanzhou) to

develop high-quality U-shaped steam tubes for use in

nuclear power plants. However, the nuclear power

disaster in Japan earlier this year has cast some doubts

on the plan, as China’s government has announced a

temporary moratorium on new nuclear power plants and

those projects may proceed more slowly in the coming

years.

In an effort to decrease costs incurred from high raw

materials prices, Xinxing has begun searching for new

sources of iron ore. The mill signed an agreement with a

local prefecture in Hubei province last year to develop a

new iron ore mine with 5m t/y output. The Fe content of

the mine is quite high at 30-47%, however the ore’s high

phosphorus content will require additional processing.

Xinxing has also signed a number of agreements with

Xinjiang to develop new mines in the region.

In Profile

Xinxing Ductile Iron Pipe 新兴铸管股份有限公司

For more information visit http://www.xinxing-pipes.com

A brief history of Xinxing

2008

2011

SBBAnalyticsChina

Xinxing starts its first wire rod mill

with 700/000 t/y capacity.

The mill also signed agreements with

local governments in Hubei and

Xinjiang to develop new iron ore

resources in their respective regions.

Xinxing signed an agreement with

Sanzhou to develop high quality U-

shaped steam tubes for use in nu-

clear power plants.

The mill also signed its 3rd agree-

ment with Xinjiang to develop new

iron ore resources in the region.

Xinxing opened a rebar mill at its

subsidiary in Wuhu, Anhui province.

The mill is expected to have 1m t/y of

capacity when fully operational.

Xinxing also signed a JV agreement

with Xinjiang International Industry to

open a new steelworks in Jinte,

Xinjiang.

2010

Ductile iron pipe casting at Xinxing


6 September 2011

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the world of steel─鋼鐵的世界 - 6 september 2011 china prices … · 2011. 9. 6. · steel...

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