Baosteel Still under Pressure from High Inventories

飞雪寒冰

Baosteel Group, parent of Baoshan Iron & Steel Co., is still trying to clear inventories that started building up during last year’s economic slowdown, with demand remaining weak four months into 2009, an official with Baosteel’s investment department told Caijing.



The official, who asked not to be identified, gave no details, but his remarks reinforce comments made by Baosteel general manager Fu Zhongzhe in late March that inventories of steel products were at the time equal to one month’s production.



Weak demand and the resulting inventory built up were the main reasons behind Baosteel’s weak performance in 2008. As with many Chinese industrial companies, Baosteel ordered raw materials while prices were still buoyant earlier in the year, but could not move enough products late in 2008 as the economy ground to a halt.



It also had to mark down the value of its inventory when prices collapsed, in accordance with accounting rules. The record 5.9 billion yuan worth of writedowns in the fourth quarter produced a 49.2 percent drop in net profit to 6.5 billion yuan for the listed company.

飞雪寒冰

Baosteel has cut production since the fourth quarter in order to decrease inventories and operating costs.



The company announced in early April that it will cut ex-factory prices on major steel products for a second straight month in May as a further move to boost sales and lower inventory.



“Domestic steel supply is expected to exceed demand in 2009,” general manager Fu said then. “The company will adjust production and sales plans based on market moves.”



Chen Ying, chief financial officer of Baosteel, also said earlier that further production cuts are necessary, as infrastructure plans in the 4 trillion yuan stimulus package will take time to drive a real recovery in steel consumption.



Zhu Limin, analyst with Shanghai Securities, told Caijing that cost, insurance and freight for imported iron ore will stay high in March and April under 2008 contract terms, while inventory is expected to diminish gradually to normal levels by the end of the second quarter.



China’s steel products exports declined 52.1 percent to 3.47 million tons in the first two months of 2008, according to earlier data provided by the General Administration of Customs.