Employees work at a steel mill in Dalian, Liaoning province, China. Picture: REUTERS
Employees work at a steel mill in Dalian, Liaoning province, China. Picture: REUTERS

Shanghai  — The top steel mill in China has issued a one-two warning about the outlook, saying it sees the twin risks of slowing demand and rising output in the country that accounts for half of global production. The shares sank.

Contraction in industries including property and vehicles will slow consumption in 2019, although infrastructure remains relatively robust, Baoshan Iron & Steel  said in a statement as it reported record profit for 2018. Exports are set to drop amid global trade frictions while supply may expand, said the listed unit of China’s biggest steelmaker, China Baowu Steel Group.

The mainland steel market sets the tone for conditions in the industry worldwide, with trends in demand, supply, pricing and exports carrying implications for mills around the globe. The downbeat outlook from Baosteel contrasts with a run of positive signals from Asia’s biggest economy as first-quarter growth topped expectations, steel prices rebounded and mills’ profitability improved. Still, it follows a surge in the cost of iron ore — used to make steel — which has rallied to mutli-year highs on a supply squeeze.

The shift in the mill’s outlook was captured in its earnings figures. While profit for 2018 hit a record 21.6-billion yuan ($3.2bn) — with earnings of about 5-billion yuan each quarter — net income in the first quarter of 2019 fell to 2.73-billion yuan, down 46%, the mill said.

Huge challenge

The slump in Baosteel’s first-quarter earnings is not surprising as elevated costs, including iron ore, pose a huge challenge, according to Helen Lau, an analyst with Argonaut Securities. Steelmakers could not  pass on the higher costs due to the weakening macro economic situation, she said.

Baosteel shares ended 4.4% lower in Shanghai on Thursday, putting them on track for the biggest weekly drop since mid-2018. Over the past year, the stock is 22% lower, although it remains higher year-to-date.

Full-year sales of steel products are expected to drop to 46.8-million tonnes in 2019 compared with 47.1-million tonnes in 2018, while revenue slides to 273.1-billion yuan from 305.2-billion yuan, Shanghai-based Baosteel said.

The mill also cited weakness in autos among drivers of slowing consumption in 2019. China’s vehicle  market shrank for the first time in almost three decades in 2018 as the economy slowed and the trade war with the US hurt spending.

Nationwide steel supply faces pressure to increase as new facilities gradually come on line under a swap-programme with idled capacity, the producer said.

China churned out 231-million tonnes between January and March, up almost 10% from a year earlier and the highest for any first quarter on record.