Chinese Gov't Warns of Overheating in Steel Industry

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Last updated at: (Beijing Time) Wednesday, August 13, 2003

Chinese Gov't Warns of Overheating in Steel Industry

The Chinese government warned of growing risks of overheating in the steel and iron industry Tuesday, but there were still no signs of serious oversupply in the market.

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The Chinese government warned of growing risks of overheating in the steel and iron industry Tuesday, but there were still no signs of serious oversupply in the market.

The State Development and Reform Commission (SDRC) said in a news release Tuesday that a huge amount of steel-making capacity was to come into production in the next three years. This means increasing market risks for existing steel plants and those to be completed in the next few years.

The SDRC warned financial institutions, local governments and steel companies to be fully alert of the potential risks and take pre-emptive measures to nip the problem in the bud.

It warned that irrational expansion of the steel industry would incur risks of oversupply, an imbalance of industrial structure, cause new bad debts to banks and jeopardize improvement of product and industrial structure.

In the past 18 months, China's steel industry saw the strongest surge in investment since the early 1990s. The capital expansion was fueled by soaring demand for steel as China embarked on large-scale infrastructure construction projects all over the country.

Local analysts said steel production capacity might become redundant if investment in infrastructure slowed down in the future. As a result, steel prices would fall, stockpiles rise and profitability of steel companies slump. They said losses or bankruptcy of steel companies might cause more steel workers to lose their jobs and add new bad debts to banks, which in turn would incur more social problems.

The SDRC said more than 200 of the existing 280 steel companies in China were small, each with an annual output of less than 100,000 tons. Many were high in pollution and low in energy efficiency. The increase in the number of such small companies exacerbated water and electricity shortages in certain areas such as east and north China.

Since bank loans account for 50-60 percent of the financing of investment in new steel plants, risks are growing that bank loans might become bad debts, should the steel market take a downturn.

The SDRC said most of the newly production capacity was in the lower end of production lines. On the other hand, China still had to import 30 million tons of steel this year, according to the SDRC.

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