MaSSSoftech

By Bloomberg News

Aug. 17 (Bloomberg) -- Baoshan Iron & Steel Co., Angang Steel Co. and rival Chinese mills will likely report slumps in first-half earnings from this week. Things will get better, Credit Suisse Group AG and JPMorgan Chase & Co said.

Baoshan, China’s largest mill, may record a 98 percent profit slide for the first six months, and earnings will rebound to $1 billion in the second half from a loss a year ago, Credit Suisse said. Infrastructure projects and “explosive” steel demand will end a year of earnings declines, JPMorgan said.

“We expect profitability to improve as a result of contract price increases” and lower costs, said Jing Ulrich, JPMorgan’s chairwoman for China equities and commodities in Hong Kong. “Demand is particularly strong from the automobile, infrastructure and real-estate industries.”

Steel output reached a record and prices have soared 29 percent since the government announced a 4 trillion yuan ($586 billion) stimulus package in November to revive the economy. Record passenger car sales and a surge in construction have spurred demand, while costs of raw materials have dropped.

Angang, a unit of China’s second-largest steelmaker, may post a first-half loss of as much as 2.99 billion yuan today, according to an earlier company forecast. Last November, Baoshan Steel’s parent, the world’s third-largest mill, said output, sales and profit plunged as the company faced its “most difficult” period since its founding 30 years ago.

Shanghai-based Baoshan Steel, reporting on Aug. 28, has risen 60 percent this year, compared with a 58 percent gain in the benchmark Shanghai Composite Index. Liaoning province-based Angang has surged 76 percent in Hong Kong trading. Wuhan Iron & Steel Co., the fifth-largest mill, soared 84 percent.

Further Stock Gains

Profit for mills this quarter may rise between 30 percent to 50 percent from the three months ended June, said Wu Kan, a Shanghai-based fund manager at Dazhong Insurance Co., which manages about $285 million. “If the results match or beat market expectations, steel stocks would rise further,” he said.

Baoshan Steel has raised prices for three months since July, and Wuhan Iron & Steel, Hebei Iron & Steel Group and Jiangsu Shagang Group Co. have announced increases in the past month.

China won a 35 percent cut in iron ore prices from Fortescue Metal Group Ltd., and will ask the biggest producers Vale SA, BHP Billiton Ltd. and Rio Tinto Group for a similar reduction, the China Iron and Steel Association said today.

Profit Jumps

Credit Suisse raised 2009 earnings estimates for Baoshan 53 percent to 7.2 billion yuan on Aug. 7, and predicted a second- half profit of almost 7 billion yuan. First-half income likely dropped to 186 million yuan from 9.64 billion yuan a year ago.

Angang Steel’s earnings will jump to 2.5 billion yuan for the six months ending Dec. 31, according to the brokerage. Baoshan and Angang lost a combined 6.2 billion yuan in the second half of 2008.

Baoshan Steel and Angang Steel declined to comment.

Baoshan fell 7.6 percent today to 7.44 yuan in Shanghai, and Angang fell 5.6 percent to HK$15.26 in Hong Kong. China’s stocks dropped today after metal prices slumped and investors worried this year’s rally was overdone.

Demand will improve in the second half, the China Iron & Steel Association said July 31. The nation’s 71 largest mills posted a combined profit of 3.55 billion yuan in June, the second gain after seven months of losses, the Ministry of Industry and Information Technology said July 29.

Rising Usage

Capacity use at Chinese mills have exceeded 90 percent for reinforcement bars, up from 70 percent earlier, said Zhao Xiange, a Shanghai-based analyst with Shenyin Wanguo Securities Co. For hot-rolled coil, the rate is 80 percent, he said.

China’s industrial output gained 10.8 percent in July from a year ago, the National Bureau of Statistics said Aug 11. Car sales soared 70.5 percent, the biggest jump since January 2006.

“Profit margins for some steel production have reached records,” said Wanguo’s Zhao. “Steel prices will rise in the second half because of demand driven by the stimulus.”

China’s steel revival will push global prices higher, UBS AG said last month. Posco, South Korea’s largest steelmaker, raised its 2009 output target by 6.4 percent last month.

Steel prices in the U.S. rose 13 percent in July, the first gain in a year, after distributors began restocking, Purchasing magazine said July 31.

Beware Correction

The rapid gains in Chinese prices have prompted users to run down inventories, said Umetal Research Institute’s analyst Hu Yanping. Hot-rolled coil prices fell 6.4 percent for the week ended Aug. 14, the first decline in six weeks.

“Traders dare not restock on concerns prices had risen too fast,” said Hu. “There may be a correction for a few more weeks. After that, prices will move up again with the positive fiscal and monetary policies still in place and also because the global environment is slowly warming up.”

Baoshan Steel and the larger mills may post bigger profit gains than their smaller rivals in the second half because flat product prices, which have lagged behind long products, may catch up, Wanguo’s Zhao said.

Flat products, such as cold-rolled coils, are used in cars, appliances, ships and pipes. Long products are used in construction.

--Helen Yuan. Editors: Tan Hwee Ann, Teo Chian Wei.

To contact the Bloomberg News staff on this story: Helen Yuan in Shanghai at hyuan@bloomberg.net