Oct. 30 (Bloomberg) -- Baoshan Iron & Steel Co. and Angang Steel Co., posting the best quarterly profit in at least a year, now face slower growth as oversupply in the world’s largest steel-producing nation reduces prices.

Demand is easing amid “rising pressure from overcapacity,” Baoshan, the largest Chinese mill, said yesterday. Angang Steel Co. said Oct. 27 that earnings this quarter will be less than net income in the past three months.

Benchmark Chinese steel prices have fallen 21 percent from a 10-month high on Aug. 4 as production overwhelmed demand fueled by the nation’s 4 trillion-yuan ($586 billion) stimulus spending. Steel output in China reached highs in four months this year, spurring record imports of iron ore from producers such as Rio Tinto Group and Vale SA.

“The severe overcapacity creates cutthroat competition among Chinese steelmakers, giving them little pricing power,” said Fu Hao, a Guangzhou-based fund manager at E Fund Management Co., which manages the equivalent of about $16.1 billion. “There is good steel demand, but prices are bad because of the excess competition.”

Baoshan gained 1.3 percent to close at 6.84 yuan in Shanghai. Liaoning-based Angang, the second-largest Chinese mill by market value, rose 2.4 percent to HK$14.70 in Hong Kong.

Steel inventories held by large Chinese companies rose 10 percent this year to 7.2 million metric tons as at the end of September, the nation’s industry ministry said. BHP Billiton Ltd., the world’s largest mining company, said yesterday it was seeing signs of a pullback in commodity demand from China.

Rising Pressure

Shanghai-based Baoshan Steel may post earnings per share of 0.13 yuan in the fourth quarter, according to the mean estimate of three analysts compiled by Bloomberg, down 24 percent from the 0.17 yuan for the three months ended Sept. 30. Baoshan’s third-quarter profit was its highest in five quarters.

“There is rising pressure from overcapacity and demand growth is slowing down,” Baoshan Steel said in its statement yesterday. “Steel inventories are at high levels. Demand is weak for steel pipes and heavy plates in the fourth quarter.”

Angang Steel may report a profit of as much as 1.17 billion yuan or lose as much as 330 million yuan in the three months ending Dec. 31, based on figures derived from a range of full- year forecasts. Third-quarter net income was 1.89 billion yuan, the highest in a year.

Close to Costs

Baoshan and Angang Steel “are cautious on the sector, mainly on capacity oversupply concerns,” Goldman Sachs analysts led by Song Shen wrote in an Oct. 23 note, after a conference call with executives. “Producers’ cautious stance is in line with our expectation as they are facing close to cash cost-level prices.”

Maanshan Iron & Steel Co., the second-biggest Chinese mill listed in Hong Kong, probably had its best earnings for the year in the third quarter, Morgan Stanley analyst Charles Spencer said Oct. 28. The mill said Oct. 27 that third-quarter profit rose 2 percent to 802.3 million yuan.

The Chinese government is working on plans to close obsolete mills and promote mergers, Deng Qilin, chairman of the steel association, said Oct. 13. Some mills have incurred losses at current prices which won’t rebound this year, he said.

Baoshan has cut monthly prices twice since September. Hebei Iron & Steel Group, China’s second-biggest mill, and Jiangsu Shagang Group Co. have also dropped prices.

Chinese steelmakers will be forced to cut output for the rest of the year, Jiangsu Shagang, the nation’s fifth-largest mill, said this month. Steel demand growth in China may slow to 5 percent next year, down from an expected 19 percent this year, the World Steel Association said Oct. 12.

Full Capacity

Goldman Sachs said the steel mills are still seeing strong demand from builders and makers of cars and appliances. Baoshan and Angang have orders covering 100 percent of capacity to the end of the year, the brokerage had said.

Volkswagen AG, the biggest overseas carmaker in China, sold a record number of vehicles in September in the country. The Asian nation may boost sales 28 percent to 12 million units, the National Development and Reform Commission said last month.

“Demand for steel is still good, but an industry overcapacity will keep prices at low levels,” said Luo Wei, an analyst with China International Capital Corp.

--Helen Yuan. Editors: Tan Hwee Ann, Richard Dobson.

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

Last Updated: October 30, 2009 04:26 EDT