Better off putting money in the bank: China's steel companies produce lots of steel but no profits

07/05/2011 1:01 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

The statistics are impressive. China took over as the top global steel producer in 1996 and hasn’t looked back. In 2010 the country was the world’s leading steel producer again and China now has 46% of global production capacity. And China isn’t about to rest on these numbers: the 2011-2015 Five-Year Plan calls for a 25% increase in steel production.

But here’ the most stunning statistic of all: Net profit margins in China’s steel industry have been below the one-year bank deposit rate for four years running, according to the China Iron and Steel Association. For the first five months of 2011, the country’s 80 major steel makers reported that net margins fell 0.67 percentage points to 2.91%.

The CEO of a Chinese steel maker would have been better off just putting his company’s money in the bank where deposits earn a current 3.25%.

With a 2.91% net margin, no economically rational industry would be targeting a 25% increase in production over the next five years.

But in an industry that provides a lot of jobs and big exports volumes and where most managers aren’t judged on profits, you might expect rational allocation of capital to take a back seat.

 

 

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