China faces overheating of steel industry

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Last updated at: (Beijing Time) Tuesday, December 09, 2003

China faces overheating of steel industry

As investment keeps pouring in, Chinese industrial experts warn that the steel sector is becoming overheated. Risks are accumulating in both raw material supply andthe sale of finished products.

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As investment keeps pouring in, Chinese industrial experts warn that the steel sector is becoming overheated. Risks are accumulating in both raw material supply and the sale of finished products.

China produced 179.6 million tons of steel in the first ten months this year, including 19.82 million tons produced in October, according to China Iron and Steel Association (CISA).

The whole year's figure is expected to reach 210 million tons, up 15.38 percent from 182 million tons in 2002.

"Owing to the rapid expansion of steel production capacity in recent years, prices of raw materials have been pushed to very high levels," said Wang Jiong, general manager of Wuhan Iron and Steel Company in central China's Hubei Province.

Wang said the prices of domestic ore concentrate and coke have doubled the level of last year. Prices of imported ore have also risen markedly.

The situation will worsen as new steel production projects soon join the race for limited raw materials.

"A number of new steel production projects are being built. These projects have a total steel production capacity of 120 million tons," said an authoritative analysis report.

Among these projects, there is a 5-million-ton one being built in Tangshan of north China's Hebei Province, three new plants with an aggregate capacity of 5 million tons in Anshan of northeastern Liaoning Province and a bigger one with 10 million tons of capacity in Qingdao of eastern Shandong Province.

It is predicted that China's iron ore imports will reach 140 million tons or 150 million tons in 2003. If capacity expansion keeps at the current rate, China has to import an additional 200 million tons of iron ore in 2005.

"That's impossible! The demand is beyond the supply capacity of iron ore producers in the world," said an industrial analyst.

Li Shijun, deputy secretary-general of the CISA, said new plants run the risk of a glutted market at the time they start production.

"Some plants made the investment decisions without clear knowledge of the entire market. They knew for certain the market is prosperous, but didn't know how many new plants are coming in," said Li.

Li said that in the steel rush, some plants have been built in areas that lack advantages not only in iron ore, but in coal, coke, electricity and water. They have not fully considered the fact that the steel industry is a resource, energy and technology intensive sector, as well as a big water consumer.

The Chinese government has been aware of the risks of the overheating and started to draft policies to rectify irrational investments in the sector. The remedy is expected to focus on land and credit management.

"It will be harder to obtain land for new steel production projects and bank loans," said Liu Jie, general manager of Anshan Iron and Steel Company.

Besides, the coming policies seem sure to tighten market access in the steel industry. New projects must meet requirements in the capacity of blast furnaces, auxiliary facilities, energy consumption, water consumption, and pollution discharge.

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