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Strategies & Market Trends : China Warehouse- More Than Crockery -- Ignore unavailable to you. Want to Upgrade?

To: RealMuLan who wrote (4866)	5/23/2005 3:22:44 PM
From: RealMuLan	Read Replies (1) \| Respond to of 6370

Industrial profits slow as raw material costs rise May 24, 2005 Industrial firms' profits have been hit by rising raw material prices Earnings of China's industrial companies grew at a slower pace last month as rising raw-material costs and competition hurt profit margins. Combined net income rose 15.6 percent from a year earlier to 389.3 billion yuan (HK$367 billion) in the first four months, Beijing-based Mainland Marketing Research (China) said. Profits grew at their weakest pace since the first nine months of 2002. Premier Wen Jiabao ordered a clampdown on investment and bank lending last year to curb an expansion that led to power shortages and surging raw material prices. The squeeze in profits may help slow the pace of expansion. It also raises the risk of higher bad debts at the country's banks whose combined bad loan ratio is four times higher than the average in Hong Kong. ``Banks are more reluctant to keep funding investment and that has forced companies'' to use their profits, said Jim Walker, chief economist at CLSA in Hong Kong. ``Growth in investment will fall further because companies can't fund it themselves, and if banks aren't willing to provide funds to finish these investments they are guaranteeing that they won't get their loans repaid.'' The Shanghai and Shenzhen stock indexes have been the worst performers this year among the world's 80 major equity markets tracked by Bloomberg amid concerns that the sales of non-tradable shares in public companies will lead to a deluge of stocks and the government's austerity measures will squeeze corporate profits. The Shanghai Composite Index has dropped 15 percent this year and the Shenzhen Composite Index has fallen 17 percent. ``Rising raw material prices have been mainly blamed for squeezing profit margins of industrial firms,'' Li Yan at Harvest Fund Management in Beijing said. ``The current slide in the share prices has already reflected the expectations that earnings growth for listed companies will slow down.'' Companies like China Petroleum & Chemical, Asia's largest oil refiner, and Sinopec Yizheng Chemical Fiber, China's largest chemical-fiber maker, have seen their margins narrow as they have been unable to pass on higher crude-oil costs to their customers. CLSA estimates that the net profit growth of companies listed on China's yuan-denominated A-share market has fallen from 44.2 percent in the first quarter of 2004 to less than 10 percent in the first quarter of this year. ``Companies have very little fat to cut when it comes to costs because so much of their costs are just based on input prices and raw materials, not labor,'' Walker said. Profit growth slowed from 17.2 percent in the first quarter and 38.1 percent for the whole of 2004. Profit in the oil refining and processing industry fell 66 percent in the first four months, while that in the chemical-fibers industry declined 40 percent. Building-materials producers recorded a 37 percent drop in earnings as the government tightened investment restrictions and raw-material costs increased. Profit gains were led by the oil and coal extraction, steel, chemicals and non-ferrous metals industries, the statement said. Earnings in the coal industry rose 98 percent, after more than doubling in the first quarter, as higher demand from power producers drove prices higher. Profit at oil companies rose 69.8 percent after climbing 62.7 percent in the first quarter. Steelmakers' profit rose 19.2 percent in the first four months. BLOOMBERG thestandard.com.hk