Shen Wenrong, one of China’s most powerful steel producers, says the golden age of super-normal profits for miners and steelmakers has ended.
Profits for miners and steel producers have collapsed in the past year on the back of a sharp slowdown in China, the world’s largest consumer of iron ore as well as the biggest maker of steel.
“Due to the explosive growth in the Chinese economy, it had created a chronic shortage in the supply of iron ore. The prices remained high for more than three years. It simply could not last. At its highest point, it was selling at $US180 to $US200 per tonne,” Mr Shen said.
“It was a period of supernormal profit for mining companies, margins often exceeded more than 100 per cent. It was just not sustainable,” he said.
The slowdown in the world’s second largest economy from the previous double-digit growth to 7 per cent has significantly reduced the demand for iron ore. The price of Australia’s largest export earner has tumbled.
Despite the significant drop in the cost of raw materials, China’s steel sector is still struggling. The average profit for the industry was only 0.9 per cent in 2014, according to the Ministry of Industry and Information Technology.
As revealed in TheAustralian yesterday, Mr Shen, the vice-chair of the powerful China Iron and Steel Association, believes the country’s steel production will drop at least 10 per cent within the next decade. But even this will not help the sector to boost its profitability.
“Even if the production declines by 10 per cent, the profitability will still be squeezed. The golden age or supernormal profits for the steel industry is gone,” he said. “For me, a profit margin of 5-6 per cent is very good.
“There is a chance that people can still lose money. The problem of overcapacity and razor-thin margins is not just restricted to China; it is the same everywhere,” said the veteran industrialist.
In recent years, China has been the biggest investor in Australian iron ore assets. However, the most recent data from the Foreign Investment Review Board indicates Chinese interest has shifted to the property sector.
Mr Shen says Chinese buyers are no longer interested in such assets. “There is a worldwide problem of excessive capacity in steel as well as iron ore production. It is no longer a good time to invest in iron ore.”
In the next five years, the biggest challenge for the Chinese steel sector is to curb excess capacity as well as increase its productivity.
Mr Shen wants to close the gap between his Shagang Group and the world’s leading producers such as South Korea’s Posco.
Source: http://www.theaustralian.com.au/