China’s coal and steel sector profits fall

It's not a good time to invest in a coal mine or steel mill in China.

It s not a good time to be a coal mine in China or a steel mill.

China's raw materials producers are at the forefront of falling industrial profits due to poor demand and price deflation, leading to margins at steel mills, metals smelters, chemicals firms and coal miners.

While the rate of declines slowed in April across many sectors - especially because of the base effect of comparing against last year when Shanghai was locked down - the weakening of profitability at coal mines worsened. The producers of steel for vehicles and buildings were the worst performers on a monthly basis, with steel for buildings and cars being the worst.

The profits are just the latest in a line of data that show China's economic recovery is stalling, particularly in industries linked to manufacturing and construction.

In an effort to boost domestic production, the world s biggest producer is facing a collapse in prices, as massive imports have resulted in a rise in domestic production, lifting stockpiles to historically high levels. This year, the benchmark price at Qinhuangdao port has dropped 18% to its lowest since the beginning of 2022. Due to a low industrial demand for fuel, liquefied natural gas prices have fallen 40% since the beginning of the year.

The drop is counter to normal trends because it comes despite rising temperatures, when much of the country is forced to crank up the air-conditioning.

The good days of high coal prices are pretty coming to an end, said research firm Fengkuang Coal Logistics, which also noted the ever-increasing contribution of renewables to China's energy mix.

The opposite side is that rising prices favor the power plants that run on fossil fuels. The coal-fired operations of independent power producers are likely to become profitable from the second quarter as the so-called dark spread - the profit margin of electricity rates over coal costs - grows further, said Tony Fei, an analyst at BOCI Research Ltd.

Similarly, steel mills were sounding the alarm in the middle of last year because of the crisis conditions in the industry at the height of China's Covid lockdowns. As seasonal demand reduces, another bleak summer awaits. The economy s reopening after the pandemic has hardly improved matters, and a poor construction season in the second quarter saw mills cut prices.

China is likely to reduce output again this year to meet its climate goals, which should support prices and margins. But in the absence of a resurgence in demand, that ll be cold comfort for the world s biggest steel industry, and all eyes are now on whether Beijing is ready to expand the levels of stimulus that have so far disappointed markets.

Australia's barley industry may be the next beneficiary of the thawing relationship with Beijing, Trade Minister Don Farrell said.

With assistance from Ailing Tan, Kathy Chen, Liz Yee Xing Ng, Dan Murtaugh and Liz Yee Xing Ng.

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