Steel Prices Rise, Construction Machinery Leading Costs Increase

Recently, a number of domestic construction machinery enterprises released the first half performance notice.

According to the existing data, the profitability of some companies is worrying. The operating condition may imply the profitability of construction machinery enterprises this year.

Xugong technology expects to achieve net profit of about 300 thousand yuan in the first half of this year, which is at a slight profit. Although ZOOMLION expects to increase its net profit in the first half of the year by 100%, this figure is based on the company's acquisition of a large number of high-quality assets last year.

Moreover, these companies invariably attribute the factors to the rise in steel prices.

Steel is the most important raw material in the cost structure of construction machinery.

The average annual price increase of medium plate and hot rolled plate in 2007 was 24.65% and 8.83% respectively.

Since 2008, steel prices have been accelerating upward trend. As of the end of May, the average price of medium plate and hot-rolled sheet has increased by 28.1% and 24.20% respectively, and the other common plate varieties have also increased over 2007.

"Like medium-sized cranes, there are more than ten tons of steel in raw materials.

Therefore, the rise in steel prices will inevitably erode the profitability of the machinery industry.

A staff member who worked in a famous construction machinery enterprise in China told reporters.

With the relatively mild rise in steel prices, construction machinery enterprises can solve the pressure of rising costs through internal tapping the potential and increasing labour productivity.

However, this year, the construction machinery industry is faced with a sharp rise in steel prices, which poses great challenges to the ability of enterprises to pfer cost pressures.

"Generally speaking, direct steel accounts for 13-15% of the cost. Because the main raw materials of the purchased parts are also steel, the total cost of steel is greater than that of the steel. Roughly estimated, all steel accounts for more than 30% of the cost. Therefore, most construction machinery companies are sensitive to changes in steel prices."

Shenyin Wanguo researcher Hu Limei said.

Guo Yaling, a researcher at CITIC Securities, believes that the cost pressure of many construction machinery manufacturers will rise significantly with the low cost of iron and steel consumed by enterprises ahead of schedule. Especially, the sub industries or companies that have low concentration, fierce competition, low value-added products and difficult to pfer costs will face greater pressure.

Last year's statistics may prove the impact of rising steel prices on the construction machinery industry.

Data show that in 2007 1-8, the average gross profit margin of construction machinery industry rose from 14.69% to 20.5%, and by November last year, the pressure of steel price rising began to appear, and this data dropped to 16.03%.

Therefore, the industry believes that considering the raw material inventory factors, the impact of steel price fluctuations on construction machinery enterprises this year is likely to be fully reflected in the three quarter.