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Steel capacity to be curbed

By Chen Yang (Global Times)

08:10, June 18, 2012

China's steel industry will continue to face the problem of overcapacity with an estimated steel output of 700 million tons in 2012, but a newly released industry standard will help eliminate some excess capacity, experts said at an industry seminar over the weekend.

The country's output of crude steel is expected to reach 700 million tons this year, up from 683 million tons in 2011, Zhang Changfu, vice chairman of the China Iron and Steel Association (CISA), said at a seminar held Saturday in Lianyungang, East China's Jiangsu Province.

But the domestic production capacity of crude steel reached 850 million tons by the end of 2011, according to the CISA. Zhang said the industry has been struggling with overcapacity, high stocks and declining margins.

"Domestic demand for steel products has been affected by the weak auto and property markets," Hu Yanping, an analyst at Beijing-based industry portal custeel.com, told the Global Times yesterday. She expects the country's crude steel consumption may hit up to 690 million tons in 2012.

Zhang said steel mills have seen declining margins because steel prices have dropped faster than raw material costs. Steel prices fell by 500 yuan ($78.5) a ton year-on-year in the first quarter of 2012, but in the same period raw material costs including iron ore and coking coal dropped by just 200 yuan a ton year-on-year, according to Zhang.

The industry should speed up the process of mergers and acquisitions, and outdated capacity should be eliminated, Luo Tiejun, an official from the Ministry of Industry and Information Technology (MIIT), said at the seminar.

Luo said steel makers that failed to meet a new standard for steel companies' production and operation, which was published Friday by the MIIT, will be shut down.

"The standard says steel makers should stop producing products such as deformed steel bars and hot rolled silicon steel sheets from 2013. The new standard is more specific than an earlier version released by the ministry in July 2010," Wang Guoqing, an analyst at Beijing Lange Steel Information Research Center, told the Global Times yesterday.

Wang said the new standard would force some small steel mills out of the industry and help reduce the country's total steel capacity.

"Big steel makers such as Jiangsu Shagang Group and Hebei Iron and Steel Co also produce some outdated products, but they have the ability to realize industrial upgrading and could turn to producing high-level steel products more easily," Hu said.

Zhang from the CISA also suggested that steel mills could develop steel-related businesses such as logistics to increase profitability.

"Currently logistics costs account for 11.2 percent of the total operational costs among steel companies in China, about twice the level in Japan," he noted.

Jiangsu Shagang Group, for example, started construction on a steel logistics center in 2011 and plans to invest 30 billion yuan in the project.

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