Prospects dim for China's steel market amid shrinking demand and idle capacity

Special Report:Global Financial Crisis

BEIJING, Feb. 24 (Chinese media) -- Recovery for China's steel market was not yet in sight as declining exports and excessive production capacity continued to haunt the industry, said officials from the China Iron and Steel Association (CISA).

Luo Bingsheng, CISA's executive deputy director, said at a conference on Monday that the rise in steel prices from December to February was not a sign of recovery. The country's steel market would remain subdued this year because of shrinking demand and huge capacity, he added.

CISA vice secretary general Qi Xiangdong put the rise in prices down to an increase in stockpiling.

"The financial crisis and the domestic economic slowdown resulted in contraction in both overseas and domestic markets", Luo said, noting China, the world largest producer and consumer, was facing many uncertainties.

The lingering financial crisis dragged the world economy into recession.

Many steel-consuming industries were seriously battered, especially construction, automobile and shipbuilding, which caused a steep drop in steel demand and therefore eroded China's steel exports, the Beijing Lange Steel Information Research Center said.

According to the General Administration of Customs, China exported 1.91 million tonnes of rolled steel last month, a decline of 2.22 million tonnes, or 53.8 percent, from the same month of 2008. The steel exports were also 1.26 million tonnes, or 39.7 percent, below the December level.

Xu Xiangchun, chief analyst with MySteel.com, said orders from importers had decreased sharply since the fourth quarter last year because of the dramatic international market contraction.

The prospect is not upbeat as the World Steel Association forecasted the global demand for steel would fall more than 10 percent in 2009 year on year. The Republic of Korea (ROK) and the U.S., the main importers of China's steel, would post declines of 9.5 percent and 10 percent in 2009, respectively. Japan's demand for the first quarter would slide 31.6 percent.

He added the yuan's appreciation also helped weaken the competitiveness of China's steel products. Additionally, there emerged growing concerns over trade protectionism worldwide.

The global economic turmoil also hurt China's economy, driving it down to a 9 percent growth for the whole year in 2008.

Luo said the domestic demand started to shrink in the second half of last year and would continue in the first quarter of this year as the financial crisis continued to spread.

"It is difficult for the steel industry to pick up until the domestic auto, shipbuilding and manufacturing sectors are revived", he added.

The country hammered out a four-trillion yuan stimulus plan in November to boost the economy. Luo expected the package to take effect on the steel industry in the middle of this year or the second half.

The excessive production capacity posed another challenge for the domestic steel market. The steel production capacity reached 660 million tonnes by the end of last year. The crude steel output edged up 1.13 percent to 500.5 million tonnes. The growth rate was14.5 percentage points lower than a year ago.

The figures showed some 160 million tonnes of capacity were left idle.

Luo said the idle part mainly came from high-energy-consuming and high-polluting small steel mills.

Xu said the output this year would probably stay the same or even decline.

The world economic recession, weakening exports and domestic demand pushed down domestic steel prices since the third quarter and eroded profits of steel companies.

CISA said Monday that the aggregate net profit of 71 medium-sized and large steel producers fell 43 percent to 84.6 billion yuan in 2008 as weak demand drove down prices. And 15 steel producers recorded full-year losses totaling 8.5 billion yuan.

Luo noted the steel prices ended the upward trend and fell again since Feb. 11 because there was no obvious increase in domestic demand for steel.

Experts also blamed excessive purchase of iron ore for the losses of steel companies last year.

China imported 443.7 million tonnes of iron ore last year, an increase of 60.6 million tonnes than a year earlier, which led to huge inventory.

Luo said China would like to stick to the practice of striking long-term contracts and hope the fiscal year for iron ore contracts could start on Jan. 1.

In addition, CISA will adopt an agent system for iron ore imports nationwide, which has been implemented by Japan, ROK and Europe.

Currently, China has 72 steel producers and 40 merchants allowed to import iron ore. Under the system, the 72 mills have to import according to their needs and other small and medium sized steel companies have to import through the 40 agents.

Luo said the measure would impose strict control over the iron ore imports. Qi noted the step would help stabilize steel prices.

Qi said the domestic steel companies should control their output and capacity, and reduce their purchase cost to get through the tough period. However, the macro-economic trends and the changing amount of inventory made the situation uncertain.