Baosteel may incur Q4 loss on weaker demand

Baoshan Iron & Steel Co., China's biggest steelmaker, said tumbling demand and prices may force it to write off inventories and incur a fourth-quarter loss.

Full-year profit in 2009 for the Shanghai-based mill will also likely fall from this year, Chief Financial Officer Chen Ying said on Oct. 30 in an online conference with investors.

The global economic slowdown since June has curbed demand by builders and carmakers, damped prices and turned Chinese mills unprofitable in October, the China Iron & Steel Association said. Baoshan Steel said yesterday market conditions will be more severe in the next five months.

"The worst time for the steel industry hasn't arrive,'' Liu Yuanrui, a Shanghai-based analyst with Chang Jiang Securities Co., said by phone. "The profitability of the steel industry is set to be lower in the fourth quarter and the first three months of next year.''

Baosteel rose 2.8 percent to close at 4.73 yuan, reversing a 4.4 percent decline as Chinese stocks rallied after the central bank cut borrowing costs to bolster the world's fourth- largest economy. The benchmark CSI 300 Index rose 2.4 percent.

The company yesterday posted third-quarter profit of 2.85 billion yuan ($417 million), 26 percent below analysts' estimates.

Inventory Write-Offs

The company had already set aside 990 million yuan as provision for inventory losses for its stainless steel business, the second largest in the nation, it said yesterday. It may need to write off inventories of steel products, Chen said today, without giving specifics.

Steel demand is dropping in China as carmakers and builders face declining orders. China's economy grew 9 percent in the third quarter, the slowest pace in five years.

China's economic growth will slow further in 2009, Baoshan's Chen said.

Chinese steel product exports fell by half in October, the China Iron & Steel Association said today in a statement. China, the world's biggest steel producer, will have a sharp decline in exports in the months to March as the global financial crisis worsens, it said.

About 32 percent of China's 71 biggest steelmakers incurred losses in September, the association said.

'Serious Threat'

"We believe steel industry's profitability will continue to be under serious threat in the first half of 2009 given the deterioration in the property sector and weak external demand outlook,'' Goldman Sachs Group Inc. analysts led by Song Shen wrote in a note today.

Baosteel Group Corp., the state-owned parent of Baoshan, is studying a plan to buy back shares after the stock market tumbled, Baoshan's Chen said. China is encouraging state-owned companies to increase holdings of publicly traded units to bolster the market.

Angang Steel Co., China's second-biggest mill, has said its parent Anshan Iron & Steel Group would buy back as much as 4.99 percent of its shares over a 12-month period.

Baoshan is hedging against an increase in the U.S. dollar as the company buys iron ore in the currency, Chen said. The company imports all of its iron ore through long-term contracts.