China's industrial profits nearly double as demand for raw materials rises

China's industrial profits nearly double as demand for raw materials rises

Profits rose to 711.18 billion yuan ($109.66 billion) in March, up 92.3% from a year ago, when the economy was hard hit by the COVID-19 crisis, data from the National Bureau of Statistics (NBS) showed.

The pace of growth slowed from the first two months of the year. Profits grew 179% in January-February compared with the same period in 2020. This year also saw more production than usual around the Lunar New Year holiday period as workers stayed put due to COVID-19 concerns, rather than going back home.

Strong profits in raw materials extraction and processing industries, in particular chemicals, metals and petroleum, helped drive overall industrial profit growth in March as demand picked up, said Zhu Hong, an official at the NBS in a statement.

Industrial firms’ profits rose to 1.825 trillion yuan in the January-March period, up 137% from a year ago and 50.2% from same period in 2019, according to the NBS. That brought the two-year average growth to 22.6%, it said.

“There are still fairly large uncertainties in the global epidemic trend and the international environment, and the recovery between industries is still uneven … the price of raw materials has been rising significantly, increasing cost pressures for enterprises,” said Zhu.

Upstream sectors’ profits may outperform those of their downstream counterparts due to higher raw materials costs in the near future, said analysts at Goldman Sachs (NYSE:GS) in a note.

China shares fell on Tuesday as investors focused on the slowing pace of profit growth, with industrial firms dragging the blue-chip index lower. But iron ore futures in Asia rose as strong profit growth at industrial firms fuelled a rally in the steelmaking raw material.

China’s gross domestic product quickened sharply in the first quarter and posted a record growth of 18.3%, driven by stronger demand at home and abroad.

However, the data undershot the 19% forecast by economists in a Reuters poll, and analysts expect the brisk expansion, heavily skewed by the virus-related plunge in activity a year earlier, to moderate later this year.

China’s exports rose sharply in March and imports posted their highest surge in four years last month, with factory activity rising at a faster-than-expected pace.

Many analysts, however, believe China’s export growth could lose some momentum as industrial production recovers from pandemic-related disruptions in other countries.

Liabilities at industrial firms were up 9.0% year-on-year at end-March, versus 9.4% growth as of end-February.

The industrial profit data covers large firms with annual revenues of over 20 million yuan from their main operations.

The figures combine data for January and February to exclude distortions caused by the week-long Lunar New Year, which fell in February in 2021.

($1 = 6.4853 Chinese yuan)

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