Chinese steelmakers expect poor earnings results for the fourth quarter of 2021, as coal shortages and tightening environmental controls pumped-up production costs and the debt-laden property sector dealt a blow to steel demand and prices.
Five out of 11 major steel producers estimated they will report net losses in the fourth quarter, according to S&P Global Market Intelligence calculations based on their 2021 profit alerts on stock exchanges in Shenzhen, Shanghai and Hong Kong. Only four of the companies are expected to report higher quarterly earnings than a year ago, though most companies will still report strong annual earnings for all of 2021.
A beating in Q4
The main reasons for the steep earnings decline in the fourth quarter were rising production costs amid a power crunch and surging prices of downstream materials, especially coal, Andrew Wong, chairman and CEO of Hong Kong-based Anli Securities, said in a Feb. 14 interview.
Seaborne metallurgical coal prices in China hit its record high of $615/mt amid supply crunch in the fourth quarter, reflecting the rapid climb in Australian exported coal prices, wreaking havoc on steelmakers' bottom lines.
Spending for environmental protections also rose sharply, Baoshan Iron & Steel Co. Ltd. said in a Jan. 28 filing. Baoshan is the listed arm of the world's largest steelmaker, China Baowu Steel Group Corp. Ltd.
Coal output low, prices high
Robust electricity demand in the quarter outstripped domestic coal production, which was limited by rising safety checks and stricter environmental requirements. Although the power crisis eased somewhat after government interventions, analysts expect coal prices and imports to remain high in 2022, weighing on steelmakers' margins.
Meanwhile, steel demand was hard hit by the liquidity crisis over the property sector sparked by China Evergrande Group, while the country's efforts to ensure "blue skies" for the Beijing Winter Olympics have curtailed short-term steel output. That sent steel products prices lower, with a steel price index by the China Iron and Steel Association slumping 16.5% in the fourth quarter.
2021 strong overall
Still, companies are on track to report a significant jump in 2021 earnings, thanks to rising steel prices. The CISA steel price index rose 28% from January to September 2021. Nine select steel producers are expected to see a year-over-year increase of at least 45% in 2021 EPS, while five of them are likely to book triple-digit growth or higher, according to analysts' estimates compiled by Market Intelligence.
"The [2021 annual] growth was thanks to surging demand amid global economic recovery, relatively low coal prices, and a low base effect in the first half of the year," Wong said.
And the fourth-quarter problems may be temporary. Market Intelligence forecasts Chinese steel output to decline in February, during the Beijing Winter Olympics and Lunar New Year holiday. But it is expected to recover in March, as China's new stimulus to stabilize economic growth might lift steel demand in the construction and manufacturing sectors in the first half of 2022, Ronnie Cecil, principal Market Intelligence analyst for iron ore and steel, wrote in a December report.
