China's Baoshan Iron and Steel Co reported on Monday a 16 percent rise in first-quarter earnings, beating analysts' forecasts, after climbing steel prices offset a surge in raw material costs. Baosteel, which competes with Japan's Nippon Steel Corp and South Korea's POSCO to supply China's market, posted a net profit of 4.26 billion yuan ($609 million) against 3.68 billion yuan a year earlier.
Five analysts from brokerages and fund management firms polled by Reuters had given a median forecast of 3.68 billion yuan for first-quarter earnings at the listed arm of China's largest steelmaker. Profit rebounded sharply from the October-December quarter, when earnings shrank to about 2.17 billion yuan because of weakness in the stainless steel market following a plunge in nickel prices.
Baosteel raised its major steel product prices as much as 8 percent for the first quarter of 2008, before lifting second-quarter prices a further 17 to 20 percent. Sales rose 9 percent to 47.03 billion yuan in the first quarter. "Deep cost-cutting and increased efficiency maintained stable earnings growth" in the first quarter, despite rising materials costs and fierce winter weather in China, which disrupted power supplies, the company said in a statement.
Financing costs shrank 69 percent to 92.8 million yuan during the quarter because the company made a foreign exchange profit as it increased US dollar financing and the yuan appreciated, Baosteel said. Also, depreciation costs improved by about 370 million yuan because of a write-back as the profitability of its stainless steel business improved, the company said.
This offset a drop in Baosteel's investment profits as China's stock market slumped. Baosteel posted an investment profit of 290.1 million yuan for the latest quarter, compared with a similar profit of 440 million yuan a year earlier. Analysts said the first-quarter results would not necessarily prompt a strong rise in Baosteel's shares, given the recent weakness of the Chinese stock market.
But they said the results suggested that after a 3 percent drop in net profit for 2007, the first annual fall since 2001, Baosteel was on track to see profit rebound more than 30 percent this year.
"Baosteel will show a better result in the second quarter as its price hike for the period will counterbalance all the cost increases, while its stainless steel business is set to improve further," said analyst Helen Lau at Daiwa Securities. "Its earnings for 2007 are likely to meet the market consensus of over 17 billion yuan, if the company raises steel prices further in the remainder of the year."
Baosteel's parent group has agreed on behalf of Chinese steel mills to price increases of at least 65 percent for iron ore supplied by Brazilian miner Vale in the fiscal year that started in April. But Lau said Baosteel would obtain some relief from rising materials prices in the form of concessionary prices for coking coal. Baosteel has signed partnership agreements with several leading coking coal suppliers in China, a major producer.
"The cheaper coking coal price compared to Japanese steel firms will help major Chinese steelmakers, such as Baosteel, improve their profit margins and their profitability in 2008.
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