The specter of overproduction haunts China's steelmakers again

Expectations of an uptick in steel production in China, along with signs of weakening demand, are pooled, creating worries for Chinese steel companies.

Steel prices in China have weakened this year after two years of gains, and steel rebar traded in Shanghai fell 15% from a peak in December amid concerns about renewed production growth and cool demand.

Shares in major Chinese steel companies such as Baoshan Iron & Steel Co Ltd, Angang Steel Co Ltd and Maanshan Iron & Steel Co Ltd corrected sharply in February and March before starting a slight rebound.

As a result of Xi Jinping's reform to reduce industrial capacity and abate emissions, China has shut down many illegal and polluting plants throughout the country over the past two years.

The move triggered a massive increase in the prices of steel-to-aluminum commodities, as well as shares in Chinese steel mills that have long suffered from overcapacity. Major steelmakers such as Baoshan, Angang and Maanshan were the main beneficiaries of the reform as they received a higher share price.

Now the rise in production and falling steel prices have begun to affect the profits of metallurgical companies. China's steel industry, the world's largest, posted a slide in its first quarter earnings. According to the data, Baoshan and Angang are expected to see a sharp slowdown in their revenue growth this year. Maanshan Iron & Steel is likely to post a drop in earnings.

“The overall demand for steel has been falling since last year. We are relatively pessimistic, ”said Yang Kunhe, an analyst at Pacific Securities Ltd, adding that spending on real estate and infrastructure in China is currently in a downtrend and this is unlikely to be offset by a recovery in production.