The steel industry is facing a significant downturn as we move into 2024, marked by ongoing challenges such as an imbalance between supply and demandThis has resulted in a decline in profits, which is evident from the preliminary performance forecasts of several listed steel companiesAccording to recent findings, 25 publicly traded steel firms have issued their earnings projections for the coming year, and the data reveals a bleak outlook: only two companies expect an increase in profitsFurthermore, three firms anticipate switching from profitability to losses, while 12 others project an increase in their net losses compared to the previous yearAdditionally, eight companies are reporting a notable drop in net profits attributable to their parent companies.
The circumstances are complex, as multiple sources within the industry have indicated that a deepening imbalance in supply and demand has led to consistently declining steel prices, which in turn has heavily impacted profit marginsAmid this financial pressure, many companies are exploring cost-cutting and efficiency-improvement strategies as their primary response, with many turning to the possibility of mergers and acquisitions as a means to strengthen their market positionsThis trend towards consolidation is seen as a necessary approach to mitigate price wars and facilitate greater control over production capacities.
Indeed, the China Iron and Steel Association (CISA) has been advocating for industry-wide consolidation for some timeRecently, several steel companies have signaled their intention to ramp up merger and acquisition efforts, actively seeking relevant targets to improve their competitiveness in a challenging marketAnalysts believe that expectations for mergers and acquisitions are on the rise, pointing to a possible enhancement of industry concentrationHowever, companies must remain cautious regarding the risks associated with integration and coordinated management during such transformations.
As the year unfolds, numerous steel companies have begun disclosing their performance forecasts for 2024. The overarching theme is a stark reminder of the pressures the sector is under, largely stemming from an unresolved supply-demand imbalance
Advertisements
For instance, Benxi Iron & Steel Group announced an anticipated loss of 5.02 billion yuan for the upcoming year, while Ansteel Corporation forecasted losses approximating 7.11 billion yuanSimilarly, Maanshan Iron & Steel Company projected a loss of about 4.6 billion yuan, reflecting an increased deficit of approximately 3.27 billion yuan compared to the preceding year.
In addressing the root causes of these expected losses, Maanshan highlighted that the steel industry is entering a phase of deep adjustment, characterized by a shift towards "volume reduction and optimization of existing resources." The ongoing imbalance in market supply and demand has pressured steel prices downward, alongside elevated raw material costs, leading to diminished profit margins for steel companies.
Benxi also acknowledged that starting in 2024, the sector continues to experience a robust supply coupled with weak demandHighlighting the persistent downward trajectory of steel prices, they noted the rising costs of raw materials, creating a challenging landscape laden with high production levels, costs, and inventory, but marred by low demand and pricesDespite adopting a variety of measures to counteract the pressure, the company has been unable to reverse its financial losses.
An examination of the steel sector reveals an increasingly pronounced supply-demand imbalance, a phenomenon that has driven down steel prices while simultaneously inflating raw material costsAccording to Kang Zirian, the founding partner of a capital firm with years of experience in mining research at the China Minmetals Corporation, the over-investment in steel-making capacities in recent years has resulted in a scenario where supply significantly exceeds actual demandWhile government policies have aimed to curtail excessive capacity, many enterprises have sidestepped these regulations through equipment upgrades, perpetuating the lingering issue of overcapacity.
He further elaborated on the interplay of various factors affecting the steel sector, such as stringent real estate regulations and debt reduction measures imposed by local governments dampening infrastructure investment, which has in turn weakened demand for steel
Advertisements
Additionally, fluctuations in iron ore and coke prices have exerted upward pressure on costs, particularly as the international iron ore market remains dominated by a handful of major players, resulting in persistently high pricingTrade tariffs imposed by several countries on Chinese steel products have further complicated export dynamics.
As consensus builds that 2024 will be a year of significant adjustment for the steel industry, statistical data from the National Bureau of Statistics indicated expected production levels: crude steel production is projected to reach 1.005 billion tons, a decrease of 1.7% year-over-year; pig iron production is anticipated to decline by 2.3% to 852 million tons; while steel output is expected to rise 1.1% to 1.4 billion tonsHowever, the apparent consumption of crude steel is predicted to drop by 5.4% to 892 million tons.
CISA has observed that while output is expected to decrease, the associated declines in steel consumption will be much more pronounced, with demand remaining tepidIn fact, the proportion of steel used in the construction sector has further diminished to just 50%, while its usage in manufacturing has risen from 42% in 2020 to 50% in 2024, indicating a continued structural shift within the industry.
Given the pressure from weak demand and high costs, a crucial focus for publicly traded steel companies is how to endure the industry’s challenging winterA prevailing strategy is to adopt measures aimed at reducing costs, enhancing efficiency, and transitioning toward upgrading technology and processesHuazhong Steel noted in its earnings announcement that it is seizing opportunities presented by a new wave of technological advancements and industry transformation to promote initiatives that reduce costs and enhance efficiency in their operations.
Other companies like Zhongnan Steel are innovating their business models, emphasizing lean management and performance benchmarking to stimulate internal growth
Advertisements
Such initiatives have somewhat mitigated adverse market impacts, yet the persistent imbalance between supply and demand coupled with corresponding pricing pressures and necessary maintenance on production facilities has undeniably contributed to profitability challenges.
To navigate the ongoing downturn, some steel firms are actively seeking to downsize and optimize productionThis includes closing inefficient operations and curtailing supplies of low-end products, while simultaneously pivoting towards enhancing production quality for high-end steel products such as auto sheets and electrical steelSeveral companies are also considering a strategic shift towards special steel products to carve out niche markets.
Kang Zirian also suggested that companies should leverage digitalization and information technology to refine R&D practices, optimize labor costs, and improve operational efficiency, thereby identifying avenues for cost reductionThere is potential for diversification into non-steel business avenues, particularly by tapping into sectors like new materials and electric vehicle marketsThis could entail a comprehensive approach that integrates upstream and downstream operations within a unified business model, enhancing resilience against economic fluctuations.
Moreover, as the momentum for mergers and acquisitions builds within the industry, many recognize that this could present an opportunity to consolidate resources effectivelyAn emerging consensus is that through strategic partnerships, companies can dilute the extreme competition that has recently characterized the market, facilitating a sustainable business environment.
On January 20, at a summit held by CISA, the discussion underscored the importance of cooperation over excessive competition in traditional industries like steel and cementThe summit emphasized the critical need for collaboration to generate healthier market conditions and improved profitability through enhanced resource allocation.
Indeed, this call for merger and acquisition in the steel sector is gaining traction
Advertisements
Advertisements