Capacity Cuts Results In Robust Profits For Listed Chinese Steel Companies

Steel prices saw a rise as there was reduction of outdated supply because of cuts in production capacity of China’s listed iron and steel producers resulting in most reporting strong profits for 2017.

There was surge of net profits by 30 times in 2017 compared to 2016 for Xinjiang Bayi Iron and Steel Co., according to its annual report filed with the Shanghai Stock Exchange. The operating revenue of the company rose by 69.44 percent to 16.76 billion yuan. The capital reserve of the company is being planned to be used for doubling the number of shares owned by all shareholders of the company. The price of the shares would be halved and hence there would be no impact on the market cap of the company.

Following this disclosure by the company, it was swiftly asked by the Shanghai Stock Exchange to explain the factors and the sustainability of the rapid growth in its profits, the feasibility of the plan of the company to double the number of shares and the associated risks of the current share price and price earning ratio of the company.

The company had made a net profit of 37 million yuan in 2016 after two consecutive years of losses of over 2 billion yuan in 2014 and 2015.

There has been an increase of over 107 per cent in the share price of the company in 2917 and 10 per cent so far this year because of the enhancement in the profitability of the company.

The stock exchange also posted similar queries with Hunan Valin Steel. The losses that the company had incurred in previous years had put it under “special treatment” (ST) at the beginning of May 2017. With a net profit of 4.12 billion yuan, Valin posted the largest profits among steel companies in 2017. In contrast, it has incurred losses of almost 3 billion yuan in 2015 and loss of more than 1 billion yuan in 2016.

The Shenzhen Stock Exchange also inquired into the annual results of the company but the company moved away from the stock exchange last week after responding to the queries.

The outcome of the capacity reduction efforts by the Chinese steel companies is reflected by the significantly enhanced performance of both the companies.

According to available data, compared to a combined loss of 1.25 billion yuan in 2016 by 11 steel companies, they made total profits of 20.13 billion yuan in 2017.

Economic growth in China had been impacted in recent years by reduction in corporate profits because of reduced rice of steel and coal. This was due to a production glut in the sectors and the Chinse authorities had been striving hard to reduce production capacity in order to revive the sectors.

As a part of the supply-side structural reform in China, the steel capacity has been reduced by about 115 million tonnes in the last two years. This cut and the consequent reduced supply resulted in the companies to concentrate on quality of the products in place of getting into price wars.

Corporate profitability has been raised and demand-supply relations has been enhanced by the capacity cutting off efforts by the government, Valin said.

(Adapted from Xinhaunet.com)

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Categories: Economy & Finance, Strategy, Sustainability, Uncategorized

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