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The crush of too much

By Wang Jiamei (Global Times)

08:25, May 02, 2012

Nearly every keynote speaker at the 8th Steel Supply-Demand Development Strategy Forum on April 21 and April 22 in Shanghai mentioned the massive profit losses the industry recorded in the first quarter this year.

It makes sense, as the event came on the heels of the China Iron and Steel Association's (CISA) latest report on the earnings of China's major steel producers, which showed they lost 1.03 billion yuan ($163.38 million) in the first quarter of 2012. "It was their first quarterly loss in a decade," CISA deputy secretary-general Li Xinchuang said at the forum. "It was the sharpest drop in industrial profits reported by any manufacturing sector."

It's common knowledge that the problems of China's steel industry stem from lofty iron ore prices. But experts say that ore prices don't deserve all the blame. About 40 percent of China's steel companies reported losses for the second half of 2011 - a period in which iron ore prices plunged by more than 20 percent, from $190 per ton to $150 per ton on average.

"Along with the rising cost of raw materials, severe overcapacity has squeezed the industry's profit margins as it has kept downstream steel prices in check," said Liu Qiong, an analyst with SteelHome, a company that provides intelligence on the steel industry.

Despite central government's efforts to rein in capacity, loopholes in the regulations and the pursuit of economies of scale have exacerbated the problem, which has eviscerated the industry's once enviable profit margins.

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