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Soaring ore prices to make a dent in automakers profit margin
Shanghai. February 25 (Gasgoo.com) - A 70 percent iron ore price hike this year will drive steel prices higher, which will in turn cut the profit margin of Chinese automakers by 1 percent, according to a report prepared by Industrial Securities Co.
The report said that if steel price raise an average of 400 yuan ($56) a ton, the Chinese auto industry will lose 6 billion ($840 mln) to 6.4 billion yuan ($896 mln) in profit gains.
Since the profit margin of China's auto industry is only 5 percent in 2006, the one percent drop would be a substantial loss for the industry. In 2006, total revenue of China's auto industry reached 1,529 billion yuan ($21.35 billion), but total profit was only 76.8 billion yuan ($10.7 billion).
Industry analysts say steel prices will continue to grow in the next few years. To confront this situation, experts urge automobile companies to take steps to cut costs and save raw materials.
Earlier last week, Asia's three largest steelmakers - Nippon Steel Corp., JFE Holdings Inc and Posco have agreed to a 65 percent increase in iron ore contract prices with Brazilian ores suppler Companhia Vale do Rio Doce starting April 1. The price settlement was 35 percent higher than some Chinese analysts estimated.
China's largest steel maker, Baosteel, agreed on last Friday to pay 65 percent more for iron ore to Brazil's Cia Vale do Rio Doce, for 12 months beginning April 1, 2008, according to Xinhua News Agency.
Baosteel is expected to raise its steel product prices for the second quarter at the end of this month to cover the rising costs of the raw material. Soaring coal and shipping costs have combined to push up the raw material cost and squeeze steel makers' profit margins.
Analysts said a steel price hike would add costs for many industries, such as auto, refrigerator and washing machine manufacturers, which are heavily reliant on steel as a raw material. Rising costs will eventually be passed on to consumers.
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