Wuhan Iron & Steel Co, one of China's major mills, said first-half net profit increased 36.5 percent to a record on higher demand and prices despite lower margins.

The company earned 4.9 billion yuan (US$714 million), or 0.627 yuan a share, in the first six months. Operating revenue gained 40.2 percent to 37.3 billion yuan on the back of higher sales and prices, the central Hubei Province-based steel maker said in a filing to the Shanghai Stock Exchange.

Steel production rose 23.1 percent to 7.2 million tons` during the reporting period, it said.

Mills are raising product prices to pass on higher raw material and fuel costs to end users in China amid rising demand.

Higher costs had dragged down its gross margin for its steel products by 4.62 percentage points to 20.99 percent in the first half, Wuhan Steel said.

China's large mills have agreed to another rise in annual contract prices for iron ore of up to 96.5 percent with Brazilian and Australian miners for the year starting April 1, and prices for coking coal also doubled this year.

Smaller mills, mainly fed by costlier spot iron ore, could be more affected by the production costs, making bigger ones more competitive domestically.

Sinolink Securities analyst Zhou Tao said in a report that Wuhan Steel's half-year results were in line with expectations, and the second-quarter was better than the first quarter. Zhou said price rises for the third quarter could offset production cost hikes.

"Third-quarter earnings could remain flat like in the second quarter, but the final quarter would be a bit lower as it's a traditionally weak season," Zhou said.

Wuhan Steel rose 1.3 percent to close at 7.82 yuan yesterday after the results, bucking a 5.21-percent slump in the Shanghai Composite Index.

(Shanghai Daily August 12, 2008)