Baoshan Steel’s Quarterly Profit Surges on Unit Sale to Parent

Baoshan Iron & Steel Co., China’s biggest publicly traded steelmaker, posted a four-fold increase in the second-quarter profit after selling two unprofitable units. Nine-month profit may rise more than 50 percent, it said.

Net income surged to 8.39 billion yuan ($1.32 billion) in the quarter ended June 30 from 2 billion yuan a year earlier, based on first-half earnings reported today in Shanghai.

Baoshan completed the sale of its stainless-steel and specialty-steel units to its parent for 42.6 billion yuan on April 1. The Shanghai-based company, which supplies half of China’s automobile steel, is facing shrinking margins as the European debt crisis and domestic property curbs sap steel demand and prices.

“We aren’t optimistic about the outlook for the third quarter as Baoshan has been cutting prices drastically,” Sarah Wang, an analyst with Masterlink Securities Corp. in Shanghai, said before the earnings announcement. “Demand from end users such as automakers, machinery and shipbuilders is stagnant.”

Operating profit at Baoshan declined 60 percent to 2.72 billion yuan in the first half from a year ago as weakening steel demand weighed on prices, it said today. Baoshan reported a pretax profit of 9.09 billion yuan by selling the units.

First-half profit rose 89 percent to 9.61 billion yuan from a year ago, Baoshan said. The company had expected an 80 percent to 100 percent increase in earnings, it said April 27.

Shares Drop

Baoshan declined 0.7 percent to close at 4.07 yuan today before the earnings announcement, compared with a 1.7 percent drop in the benchmark Shanghai Composite Index. The stock has fallen 16 percent this year. Baoshan plans to spend as much as 5 billion yuan buying back shares at no more than five yuan apiece, the company said today.

Chinese steel mills, overwhelmed by increasing capacity and sluggish demand, have struggled to remain profitable as prices plunged to an almost three-year low this month. Wuhan Iron & Steel Co.’s first-half profit plunged 89 percent to 135 million yuan from a year ago, the company said yesterday, while Maanshan Iron & Steel Co. posted a wider-than-expected loss last week of 1.9 billion yuan for the first six months.

Angang Steel Co., China’s biggest Hong Kong-traded steelmaker, today posted a net loss of 1.98 billion yuan in the first half from a profit of 220 million yuan a year ago.

Quarterly Challenges

The Chinese steel industry will face challenges in the fourth-quarter and the first-quarter next year without strong economic stimulus, China Securities Journal reported Aug. 24, citing Wang Xiaoqi, vice chairman of China Iron and Steel Association. Baoshan has cut prices for major products, including cold-rolled coils, used in cars and appliances, and hot-rolled coils, used in cargo containers and buildings, for three straight months starting July.

“There’s mounting pressure on the domestic economy” to slow further, Baoshan said in the statement, “Steel prices are unlikely to rebound in the third quarter.”

The company will carry out annual maintenance of its major production lines in the second half, it said.

China’s passenger-vehicle sales gained 11 percent to 1.12 million units last month, lagging behind analyst estimates of 1.16 million units for the first time in five months, as demand fell with the slowing economy and some consumers held back purchases in anticipation of government stimulus measures.

The country’s manufacturing may be contracting at a faster pace this month, signaling the need for more monetary and fiscal stimulus. A preliminary reading of 47.8 for a purchasing managers’ index released Aug. 23 by HSBC Holdings Plc and Markit Economics compares with July’s final 49.3 figure.

— With assistance by Helen Yuan

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