Low Profitability May Extend into 2011

The Chinese steel industry is projected to achieve a combined profit of approximately 85 billion yuan in 2010 consisting of eight billion yuan as returns on investment and 77 billion yuan generated by steel operations as main business. Although the sector's capability utilization rate was as high as 89 percent, its average profit margin was just 3.5 percent, well below the 6 percent of all other industries on average.

Price increases in the international iron ore market during the first eleven months forced the domestic steel industry to pay $26.1 billion more to secure raw materials, equal to 175 billion yuan. The recent weeks saw a constant rise in spot offers for foreign iron ore with Indian 63.5 percent Fe content material having reached $177 per ton. The Q1 contract price offered by Vale would further grow by 8.8 percent to $149.2 per ton based on the daily average of the agreed Platts index during the September to November period.

The pressure of oversupply remains in place in the steel market. Nationwide investment in the steel sector amounted to 303.1 billion yuan in the first eleven months, 5.3 percent more than the corresponding period of 2009, the equivalence of an increase in capability by 50 million to 60 million tons. China's steel output may increase by 5 percent to 6 percent this year. The global supply of iron ore may increase as well, which will help to rebalance the supply and demand situation.