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Steelmaker feels the squeeze
Angang Steel Company (0347), the second largest
steelmaker in China by market value, faces a challenging year ahead, amid
soaring cost of raw materials.
The higher cost of iron ore and coking coal, the two materials needed
to make steel, dampened the companys earnings last year.
The Liaoning-based company, which produces and sells steel products
used in automobiles, construction, ship- building, and home electrical
appliances, said net profit last year rose 6.2 percent to 7.53 billion
yuan (HK$8.41 billion), far below the market consensus of 8.58 billion
yuan due to higher cost.
Sales jumped 20.28 percent to 65.29 billion yuan, as the company
produced 14.93 million tonnes of steel products, 6.42 percent more than it
did a year ago.
However, increased costs squeezed the gross profit margin to 22.2
percent, from 23 percent in 2006.
Fu Jihui, director and company secretary said, that steel industry in
China face uncertainties this year amid rising costs and Chinas monetary
tightening measures which could affect demand domestic market as well as
exports.
Angangs first quarter earnings, which showed net profit jumped 2
percent year on year to 2.44 billion yuan a sharp rebound from
approximately 958 million yuan earned in the fourth quarter last year
failed to impress most analysts.
Merrill Lynch analyst Alexander Latzer said that first quarter earnings
were boosted by a lower tax rate as pre- tax profit declined 9.5 percent.
It appears that cost pressure s continued into 2008 and not only from raw
materials, but across the board, Latzer said, downgrading the rating for
the company to sell from neutral.
Credit Suisse cut its rating for Angang to underperform from neutral,
and lowered its 2008 earnings forecast by 4 percent and 2009 earnings
forecast by 22 percent.
We maintain our view that the best quarter for 2008 is likely to be the
first quarter, and risk on the unit profit of flat products would be on
the downside going into second half of 2008, driven by higher input costs
and potential demand elasticity under strong steel prices, Credit Suisse
said.
CLSA analyst Scott Laprise said the mainland steel producer will have
trouble passing along costs this year. It is all about margin squeeze in
China and the mills are suffering. Though the mills have been very
proactive in 2007, starting early to raise steel prices in order to pass
on expected rising costs, they have been so far unsuccessful, he said.
With more than 60 percent of [Angangs] sales to contracted customers,
it will continue to be difficult throughout 2008 to get the steel price up
to match the cost increases, added Laprise, who rates the stock
underperform.
But UOB Kay Hian analyst Zhang Xi is slightly optimistic about the
companys outlook and gives the stock a buy rating.
He said Angangs second quarter earnings could be higher than the first
quarters, as the company has raised the selling price of its products by
more than 10 percent in the second quarter.
At the same time, the company is protected from higher cost of iron ore
as it purchased the material from its parent company with a six-month lag
on iron ore price, he said.
The only cost increase will be on the coking coal, Zhang said.
Angang said last week that it raised the price of its steel products by
more than 10 percent this quarter to cover the increased cost.
The company plans to produce 16 million tonnes of steel products this
year, and cut exports to 15 percent of its output this year from 20
percent last year.
The company said its 22.6 billion- yuan new steel mill in Bayuquan port
will start operating in August.
The mill will give Angang additional capacity of 4.88 million tonnes of
steel products. 2008-04-26 |
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