General Steel Revenues Jump but Margins Get Hammered

| About: General Steel (GSI)

Non-state owned steel manufacturer, General Steel Holdings (NYSE:GSI) reported a strong rebound in first quarter revenues as shipments of steel products surged 44% to 1.03 million metric tons compared to a year ago.

Total revenues for the consolidator of domestic Chinese steel companies rose 40.3% in the first quarter of 2010 to $453 million (Q1 09: $322.8 million) as aggregate shipment volumes surged 44% to 1.03 million metric tons (Q1 09: 0.72 million metric tons). Nearly all of the increase in revenue was attributed to General Steel’s Longmen Joint Venture, which represented nearly 96% of first quarter revenues. Cash and restricted cash remained strong at $317.7 million.

However, the headline revenue number was dampened by an equal increase in total costs, which climbed 44.3% to $447.3 million (Q1 00: $309.9 million) which in turn hit gross profits, which fell 55.6% to $5.7 million (Q1 09: $12.9 million). Gross margin for the first quarter of 2010 was a very marginal 1.3%, compared to 4% in the first quarter of 2009 and 3% in the fourth quarter of 2009.

General Steel blamed the margin squeeze on the rising cost of iron ore and coke – two key ingredients in the manufacture of steel – while steel prices remained largely unchanged.

General Steel summarized:

Cost of revenues principally consists of the cost of raw materials, labor, utilities, manufacturing costs, manufacturing-related depreciation and other fixed costs.
Cost of iron ore and coke accounted for approximately 80.0% of the Company's total cost of revenues in the first quarter of 2010.

Selling, general and administrative (G&A) expenses in Q1 2010 increased approximately 32% to $12million, or 2.7% of total revenues, compared to 2.8% in the first quarter of 2009.

Finance and interest expenses for the first quarter of 2010 increased 273% to $11 million, reflecting an increase in the company’s short term loans facilities.

General Steel's Chairman and CEO Henry Yu said:

It was a challenging quarter as the price for raw materials increased while average selling prices remained relatively flat from January to the middle of March.

By the end of March, the market began to improve as average selling prices increased at a rapid rate and we were able to pass our costs onto our customers and achieve a positive gross margin. Going forward, we expect average selling prices to remain at healthier levels and anticipate that the release of the government's newly crafted steel industry consolidation guidelines in the coming months will bring about new growth opportunities.

General Steel posted a net loss for the first quarter of $5.5 million, or a loss per share of 11 cents.

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