China's metallurgy felt improvement

China's major steel companies saw the market turn for profit in the first half of 2016, but the pressure to cut overcapacity in the sector remains.

In a report submitted to the Shanghai Stock Exchange, Shandong Iron and Steel Company said its net profit was 23.15 million yuan ($ 3.5 million) in the first half, up more than 210 percent year on year. Of the 19 steel companies that have already calculated their first-half earnings, 13 reported higher profits, with eight of them more than doubling their profits.

The total net profit of the 19 steel companies reached 2.3 billion yuan in 1H 2016, compared with a loss of 1.57 billion yuan in the same period last year. The companies believe that the rise in steel prices in the second quarter contributed to profit margins.

Steel producers have faced difficulties over the past several years, due to declining demand and excessive capacity during decades of rapid growth. However, steel prices have risen over the past few months amid temporarily distorted supply as some producers have cut output to avoid losses.

But the pressure to cut overcapacity remains for the iron and steel sector, with slow progress in some regions. In the first seven months of this year, China achieved only 38 and 47 percent of its annual reduction targets for the coal and metals industries, respectively.

China plans to cut its steel and coal capacity by about 10 percent, which amounts to a whopping 150 million tonnes of steel and 500 million tonnes of coal in the next few years, given the 100 billion yuan allocated to aid laid-off workers. The government intends to cut steel production by 45 million tonnes and coal capacity by 250 million tonnes this year.

In July, the Chinese leadership called for strengthening the achievement of the targets for reducing overcapacity in the metallurgical and coal industries. The market mechanism should be used to accelerate the capacity decline, which is one of the main tasks of structural reforms in the country, according to the State Council.