Reforms mulled against threats on China's steel sector

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Last updated at: (Beijing Time) Tuesday, March 23, 2004

Reforms mulled against threats on China's steel sector

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China's steel industry, a pillar of the national economy with a comparative advantage, is going into overdrive due to an investment spree and China is considering taking effective measures to cool it down and to prevent latent threats from looming large.

Currently, domestic steel prices remain stiff in China. However, some industry insiders and economists have sensed in the air a looming end to optimism over the industry, which operated at full throttle last year.

Last year, capital investment in China's steel industry amounted to 133.2 billion yuan, a speedy growth of 89.2 percent over the previous year.

The overheating in the industry is a result of a price bottoming-out in the first quarter of 2002 and an ensuing continuous price hike, the economists believe.

They warn that one latent threat is that the steel sector is an intermediary link between the upstream and downstream sectors, which is responsive to coincidence of an overdrive of itself, a decline of iron ore and coal supply and a transport bottleneck as well as a tepid development in the downstream sectors, including auto and equipment manufacturing industries.

The overheating in the steel industry has brought out a mounting demand for iron ore, in particular ore from overseas.

China is short of high-quality iron ore. It has acquired a voracious appetite for ore imports since 1996, when it became the top steel producer in the world.

Over the past few years, ore arrivals in China grew at an annual average rate of more than 20 percent and the nation's reliance on the global ore market had aggravated to 65 percent at least.

Last year China bought over 150 million tons of iron ore from abroad, replacing Japan to become the largest iron ore importer around the world. And the figure is forecast to hit 200 million tons in 2004 and 342 million tons in 2005.

Though China claims a share of nearly 30 percent of the world' stotal trade volume of iron ore, it has till now had little say in price talks on such raw materials worldwide and thus induced a fast increase of production cost for its steel industry at large. The economists attribute the dim situation to the decentralized procurement, especially by a group of newly established iron and steel enterprises.

To reverse the overdrive trend and curb a boom-and-bust operation of its steel industry, China has decided to basically stop approval of new construction projects of steel company groups, steel mills and iron mills.

The government will tighten examination and approval of land use of steel plants. It will no longer give tax rebates to imports of equipment for the construction of unapproved steel projects.

Meanwhile, the government will also raise the threshold for entering the steel sector by readjusting requirements on technology, energy consumption, safety and quality. The banks will be requested not to provide loans for the projects that do not meet industrial policy or market accession requirements.

In combination with the anti-overheating measures, mergers and acquisitions will take place in China's steel industry to improve its overall strength.

The large number of small steel producers remain a threat to the upstream chains of the industry and a hindrance to its further development, as shown in the high production cost shored up by the decentralized purchases from the global iron ore market.

The existing steel producers in China are mulling establishment of a procurement alliance, so as to have a say in the price discovery mechanism for the iron ore trade worldwide and ensure a reasonable production cost.

Nevertheless, such an alliance will be beset with the flock of small enterprises, which will find it difficult to coordinate their interests with each other and, particularly, with the industry gurus, according to Zhao Ying, from the Research Institute of Industrial Economy under the Chinese Academy of Social Sciences.

According to Luo Bingsheng, vice president of China's Steel Industry Association, in 2003 China had 13 steel producers each with a production capacity of more than five million tons, yet they accounted for only 45 percent of the country's total annual steel output. By contrast, the leading five steel groups in Japan made up more than 90 percent of the country's total output.

It is reasonable for the share of the 13 big steel producers in China's total steel production to reach 80 percent, Luo says.

In this regard, two leading steel enterprises from northeastern China, Benxi Steel and Anshan Steel, are considering a merger scheme, which will create a second steel giant with an annual output of more than 20 million tons, following the Bao steel based in Shanghai.

Concentration of steel production capacity will help rationalize the extremely high steel price at home, which is believed to have protected disadvantageous steel enterprises, according to some economists.

Along with efforts to ensure a safe upstream chain, downstream sectors are also on the development agenda of China's steel gurus.

A major auto plate supplier in China, Baosteel is taking a series of steps to ensure its market share at home.

It has teamed up with China's top three auto makers, namely FAW,SAIC and Dongfeng, by participating in designing steel plates for their respective new models. And it has also clinched a deal with another two world leading steel giants, including Nippon Steel from Japan, in establishing a joint venture worth 6.5 billion yuan (783.13 million US dollars). The joint venture will produce high-grade steel plates for enterprises funded by Japanese and European auto makers in China.

When the overheating cools down, China's steel industry will enter a new round of readjustment. In the process, to win a secured industrial chain will mean the gain of a solid presence in the market and consolidation of competitiveness, industry insiders say.

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