Last year's one-way rise in steel prices gave steel enterprises once mired in losses a chance to turn things around. As of February 3, among the 36 listed steel companies surveyed, 33 had released their 2016 annual performance forecasts or flash reports. Of these, 29 companies expected positive net profit, accounting for 88%, and among the profitable enterprises, 25 achieved substantial year-on-year growth in net profit, while 18 successfully turned losses into profits; only 4 companies remained in the red.

After entering January this year, steel prices experienced a sustained decline followed by a modest rebound, then showed a weak and stable trend, with the comprehensive steel price index falling 1.77% month-on-month. Wang Jianhua, chief analyst at Mysteel (Shanghai Ganglian), predicted that fundamental pressures are gradually intensifying, forcing prices down, but against the backdrop of a consistently positive policy expectation and the gradual start of demand, prices are expected to stabilize or even rebound later.

Steel Price Recovery Lifts Steelmakers' Profits

In 2016, driven by both supply-side structural reform and a recovery in domestic demand, steel prices ended a five-year one-way decline, rising more than 70% during the year, and the entire industry emerged from the loss quagmire. Compared with 2015, when more than half of the 36 listed steel companies posted full-year losses, nearly 90% of enterprises expected to be profitable in 2016.

Some steel companies that had suffered huge losses staged successful turnarounds last year. Former "loss king" Jiuquan Iron & Steel (Hongxing) expected net profit of about 78 million yuan in 2016, compared with a loss of 7.364 billion yuan in the same period of 2015. Wuhan Iron & Steel, which posted a net loss of more than 7.5 billion yuan in 2015, also expected to turn profitable in 2016, with full-year net profit reaching 406 million yuan. Angang Steel expected full-year net profit attributable to the parent company of 1.610 billion yuan in 2016, compared with a loss of 4.593 billion yuan in the same period of 2015. Magang (Maanshan Iron & Steel) reversed from a loss of 4.804 billion yuan the previous year to a profit of 1.228 billion yuan last year.

*ST Bayi Steel and *ST Shaoguan Steel also both "turned over a new leaf" in 2016. *ST Bayi Steel expected full-year net profit of 20 million yuan, and *ST Shaoguan Steel expected full-year net profit of 105 million yuan.

In addition, some enterprises achieved substantial profit growth on the basis of the previous year's profits. Among them, industry leader Baosteel's performance forecast showed that 2016 net profit was expected to increase by 770%, implying net profit of possibly 88.13 billion yuan; Xingang (Xinyu Iron & Steel) went from a profit of 60.56 million yuan in 2015 to a profit of 480-580 million yuan in 2016, an increase of about 700%-860%; Fangda Special Steel also expected 2016 net profit growth of 490%-540%.

However, 4 enterprises still posted losses. Among them, Hunan Valin Steel, which lost nearly 3 billion yuan in 2015, significantly reduced its loss last year but still expected a loss of 800 million to 1.3 billion yuan, mainly due to the depressed seamless steel pipe market, asset impairment provisions, RMB depreciation, and the auto sheet company still being in the process of reaching full production and efficiency. Chongqing Iron & Steel, which lost nearly 6 billion yuan in 2015, still expected a loss of about 4.375 billion yuan in 2016, mainly because the company failed to achieve scale production and had high fixed costs such as financial expenses.

Market Supply and Demand Pressures Clearly Intensify

As of January 25, by product category, the long product price index fell 1.78%, and the flat product price index fell 1.76%. The comprehensive iron ore price index rose 8.28% month-on-month, of which the imported ore price index rose 14.39% and the domestic ore price index fell 0.40%, with the actual trend in line with expectations. Wang Jianhua analyzed that the pressure on the steel market in February is mainly reflected in increased supply-demand and funding pressures.

In terms of supply and demand, the steel industry production index rebounded to 48.6% in January, up 3.7 percentage points month-on-month, indicating that steel mills' enthusiasm for production increased significantly at higher profit levels. According to a Mysteel survey, although the operating rate of short-process enterprises fell rapidly before the holiday, the blast furnace capacity utilization rate of 163 long-process enterprises, which account for about 85% of national output, reached 82.05%, up 1.39 percentage points month-on-month and 2.87 percentage points year-on-year, with an even higher increase after the holiday.

In terms of domestic demand, even in the south, demand will not start until mid-February or later; in north and northwest China, not until late February or later; and in northeast China, demand will not begin until March.

In terms of external demand, exports were 9.73 million tons in January 2016 and 7.80 million tons in December; exports in January this year are estimated to have decreased by about 2 million tons year-on-year. Therefore, supply-demand pressure is gradually intensifying.

Steel social inventories are set to post their 11th consecutive weekly increase after the Spring Festival, and the previous nine consecutive increases saw inventories rise by 2.38 million tons, with the ninth week alone up 828,800 tons. It is expected that the peak in social inventories may appear around late February, potentially reaching 2015 levels.

It can thus be seen that supply is much larger than expected. If this continues for a period, supply-demand pressure will keep intensifying, and steel prices will inevitably come under downward pressure.

Steelmakers' Profit Outlook Positive This Year

With the sharp rise in prices of raw and fuel materials and finished products, enterprises' funds tied up in purchasing raw and fuel materials and finished products have risen significantly. At the same time, the main factor supporting steel prices is the policy expectation of cracking down on "ditiaogang" (substandard induction-furnace steel). The start of demand in some regions in March will also, to a certain extent, strengthen bullish confidence.

Against last year's industry-wide market recovery and profit restoration, steel enterprises' operating targets are expected to reach a higher level this year. China Baowu Steel Group's 2017 work conference proposed that Wuhan Iron & Steel Group's operating target this year is to achieve operating revenue of 36 billion yuan and profit of 500 million yuan. Chongqing Iron & Steel Group, which struggled last year, set a target of 100 million yuan in profit for 2017. Nanjing Iron & Steel, which turned losses into profits last year, proposed in its "13th Five-Year Plan" transformation and development plan to strive for sales revenue exceeding 100 billion yuan by 2020, with new industry revenue share surpassing the main steel business and annual profit reaching 2 billion yuan.

Overall, the market has certain expectations for sustained profitability in the steel industry this year. Changjiang Securities noted in its latest report that a sharp rise or deep fall in steel prices is unlikely in 2017, with the average expected to be higher than in 2016, while coking coal and ore on the cost side will be constrained by fundamentals. Therefore, the full-year price growth rate from high to low may be steel, coal, and ore in that order; the position of steel, the midstream smelting segment, in the industrial chain will be enhanced, and steelmakers' profit expectations will be relatively strengthened.