(Yicai Global) Dec. 8 -- Profit margins at China’s steel producers are under intense pressure after key product prices fell and the cost of iron ore, the alloy’s main ingredient, surged to an eight-year high because of an expected drop in global supply and strong domestic demand.

The recent surge in iron ore prices has exerted a profound impact on the profits of Chinese steel mills. Some companies’ margins have swerved into the red and several have begun to adjust their production lines in hopes of breaking even, Qiu Yuecheng, director of coal, steel and mineral coke research at Everbright Futures Research Institute, told Yicai Global in an interview.

The Platts iron ore price index jumped to over USD145 per ton on Dec. 4, up more than 50 percent from the year's start and at an eight-year high. The dominant contract I2101 of iron ore futures at the Dalian Commodity Exchange also rose to CNY993 (USD151.9) per ton, a record high since its listing in 2013. The dominant contract I2101 closed at its highest-ever CNY967.5 per ton yesterday, marking a cumulative over 44 percent increase within the year.

China’s iron ore port inventories have declined for three straight weeks to 124 million tons on Dec. 4 from a high of 128 million tons on Nov. 6 as steel mills' profits rebounded and their eagerness to buy raw materials accordingly grew.

The blast furnace capacity utilization rate among China’s 247 steel mills has reached 67.27 percent in the last few days, an increase of 2.14 percent over the same period last year, data from Mysteel market analytics firm also show. These mills’ average daily molten iron output climbed by 22,100 tons on the week to 2,461,300 tons in 170,000-ton yearly growth. The output of pig iron and crude steel were also both at higher levels over the same period.

Weathering Cold

However, as the weather turns colder and outdoor construction gradually halts, building steel such as rebar is set to embark on its traditional slack season before the Spring Festival, with correspondingly limited price rises in future. Shanghai rebar’s price stood at CNY3,970 (USD605) per ton on Dec. 4, a decrease of CNY30 per ton from the day before, and has risen by only 5 percent since November and 6 percent overall this year, according to data from Shanghai Metals Market.

"Currently, the profit of rebar production is basically close to the break-even point. According to calculations, the East China steel mills have recently made a profit of only about CNY100 per ton, while many steel mills in the north have had negative profits based on the latest raw material costs," said Qiu, adding, "therefore, capable steel mills may soon reduce or overhaul the rebar production lines, focusing on more profitable products such as coils and cold-rolled products. That the supply of rebar will decline in future can be expected."

Weekly rebar output dropped slightly as the fall in national stocks continued to narrow and factory inventories expanded, Mysteel data for last week show. Rebar output fell to 3.5986 million tons in a yearly 33,300-ton decrease.

Major listed rebar-related companies include Fangda Special Steel [SHA:600507], Sansteel Minguang [SHE:002110], Xinyu Iron & Steel [SHA:600782], and Shougang [SHE: 000959]. Operating income from rebar made up more than 30 percent of revenues of Fangda, Sansteel and Shougang, based on these companies’ annual reports for last year.

Editor: Ben Armour