EXPECTATIONS of a rebound in steel production in China, along with signs of softening demand, are combining to cast a shadow over the valuation of listed Chinese steel companies.

Steel prices in China have weakened this year following a two-year bull run, with Shanghai-traded steel rebar falling 15 percent from a peak in December amid worries of renewed production growth and tepid demand.

Shares of most steelmakers like Baoshan Iron & Steel Co., Angang Steel Co. and Maanshan Iron & Steel Co. saw a sharp correction in February and March before staging a minor rebound.

Reflecting investor caution over the sector’s outlook, price-to-earnings ratios of the shares of Baoshan, Angang and Maanshan are still hovering around one-year lows.

“I don’t see a lot of opportunities in steel sector,” said Pan Jiang,) chief executive officer of private investment fund Shanghai V-Invest Co. “The supply-side reform has created a lot of positive effect in the last few years but does not look likely to gain much further momentum this year.”

Driven by the supply-side reform aimed at reducing industrial capacity and tackling emissions, China closed many illegal and polluting plants across the country in the last two years. The move sparked a major rally in prices of commodities from steel to aluminum as well as Hong Kong and mainland-listed shares of steel mills, which have long been plagued by overcapacity.

Major steelmakers were the main beneficiaries of the reform as they gained more pricing power.

Now rising production and falling steel prices have started to weigh on the profits of steelmakers. The iron and steel industry, the biggest in the world, posted a slide in its profits for the first quarter. (SD-Agencies)