China’s premier steel manufacturer, Baosteel, has slammed on the breaks at its rolled steel making plant in Shanghai to avoid making any more products that they simply cannot sell.
On Friday, the Shanghai Daily reported that China’s biggest steelmaker Baoshan Iron & Steel Co. (SHA: 600019) said it has closed a mill in Shanghai due to lack of demand in a new sign of weakening growth in the world’s second-largest economy. Baosteel is down 5.77 percent year to date.
The National Bureau of Statistics said on Thursday that the month of August was the worst month for profits for China industrial companies. Profits fell on average by 6.2 percent, up from 5.4 percent declines in July.
Boasteel’s Luojing facility in northern Shanghai is being put on hold because of lackluster demand from the automarket.
The suspension is another sign of the intense pressure facing China’s steel industry, which is struggling with weak demand, falling prices and high costs, including rising labor costs. The company said it decided to halt production to avoid “further increasing its operating losses,” the firm said in a statement to the Shanghai Stock Exchange. It didn’t disclose the capacity involved or when production may start again.
Domestic demand for steel has also been hurt by Beijing’s imposed limits on residential real estate construction to prevent a housing bubble. Shipbuilding also has suffered; its industry group says orders are down 50 percent compared with a year ago and news reports say dozens of shipyards might close for lack of business. Baosteel was the first steel producer to announce the closure of a mill while others have kept mills operating at low capacity, buoyed by loans and subsidies from local governments that want to avoid losing jobs.
Baosteel had 117,000 employees in 2011, according to the company’s website. It posted 18 billion yuan ($2.9 billion) in profit last year, mostly due to selling assets rather than operating profits from customer demand.
China’s economic growth fell to 7.6 percent in the three months ended in June, it’s lowest growth in three years. Most of the problem stems from the advanced economies. With little demand for Made in China goods, and rising labor costs, China is finding itself in a bond, partially out of its control. Analysts are forecasting a rebound late this year or in early 2013, but have been missing the bottom. Barclays Capital, for instance, said the bottom in the China economy was likely to come by the beginning of the third quarter. They have since revisited that call and expect it by late in the fourth to early next year.
Barclays also said that China is more likely to stabilize than accelerate in the months ahead. But there is always a risk of deceleration if the U.S. and Europe continue to disappoint.