China's steel sector, the biggest in the world, could see a sharp decline in profits this year due to weakening prices for steel products.

 

The development is expected to spark mergers and acquisitions (M&As) in the fragmented sector starting from 2007, analysts said.

 

Zheng Dong, from Beijing-based Guosen Securities, predicted that the sector's 2006 profits would plunge by 60 percent from last year.

 

Steel prices will remain at low levels this year as a result of over production capacity, as well as slowing demand because of the central government's measures to prevent the economy overheating, Zheng said.

 

Statistics from the China Iron and Steel Association show the nation's top 68 steel makers reported 73.1 billion yuan (US$9 billion) in combined profits during the first 11 months of last year, down 1.01 percent from a year earlier.

 

Analysts anticipate the sector's full-year profits fell last year compared to the previous four years.

 

"The sector's profits are going from staggering to reasonable levels," Zheng told China Daily.

 

In 2004, profits in the sector rocketed by 68.3 percent to a record 81.2 billion yuan (US$10 billion).

 

Zhou Xizeng, from CITIC Securities, also based in Beijing, forecast that profits would fall by more than 50 percent this year.

 

"Steel prices are unlikely to recover this year to sensationally-high levels due to over production capacity and weakening demand, although they will rebound slightly from the low experienced at the end of last year," Zhou said.

 

The comprehensive price index for steel products in China stood at 94.18 points in December, down from 138.33 points in March last year, according to statistics.

 

Only 85 percent of total steel production capacity in China is utilized because of domestic steelmakers' rapid expansion in recent years.

 

The nation now has an annual steel production of more than 410 million tons, according to the steel association. China's crude steel output surged by 24.56 percent to 349 million tons last year from 2004.

 

Qi Xiangdong, deputy secretary- general of the steel association, predicted that the nation's 2006 crude steel output would grow by 10 to 15 percent.

 

Guosen's Zheng said that many Chinese steelmakers would get into financial difficulties this year as low steel prices further erodes profits.

 

"As a result, we will witness a lot of M&As in the sector, led by foreign steel giants and domestic heavyweights, or driven by the government," Zheng said.

 

Mittal, the world's No 1 steelmaker based in the United Kingdom, last October acquired a 36.7 percent stake of Valin Steel Tube & Wire Co Ltd in Central China's Hunan Province, marking the first equity merger between a foreign steel giant and a local firm.

 

According to industry sources, Mittal is also in merger talks with other Chinese steel mills, such as Baotou Iron and Steel Co Ltd in the Inner Mongolia Autonomous Region and Kunming Iron and Steel Co Ltd in Yunnan Province.

 

Arcelor, the world's second-biggest steelmaker, is negotiating a 38-percent merger deal with Laiwu Iron and Steel Co Ltd in Shandong Province.

 

Last August, Anshan Iron and Steel, China's No 2 steel company in Liaoning Province, linked up with Benxi Iron and Steel, a small player also based in the province, to form a group with an annual capacity of around 20 million tons. This has been the biggest consolidation in China's steel sector so far.

 

According to a national policy for the sector released last July, China plans to form two steel conglomerates with an annual output of more than 30 million tons each by 2010 through M&As.

 

There are more than 800 steel makers in China, but most of them are too small to have international clout.

 

The nation's top steel group, Baoshan Iron and Steel Corp based in Shanghai, produced 21.4 million tons in 2004, ranking No 6 in the world.

 

China saw a drop in imports of steel products, but a jump in exports last year due to higher prices abroad than at home, according to the steel association.

 

The nation imported 25.8 million tons of steel products last year, down 11.9 percent from 2004. Its exports grew by 44.2 percent to 20.5 million tons.

 

(China Daily January 26, 2006)