China's steel sector, the biggest in the world, is expected to reap meagre profits and even losses this year due to sagging steel prices and rising material costs, an industrial regulator warned yesterday.

Steel production capacity in China will continue to grow faster than steel demand, which will aggravate the glut in the domestic market and send prices tumbling, the National Development and Reform Commission (NDRC) said on its website.

"Cost pressures on the steel sector would persist this year as iron ore prices will remain bullish and that of coal, power and transportation would continue to grow," according to NDRC.

The regulator's warning followed analysts' earlier forecast of a sharp decline in the sector's profits this year.

In January, Beijing-based CITIC Securities Co Ltd predicted the sector's profits would slump by more than 50 per cent this year from 2005.

Growth of the sector's profits slowed down considerably last year from 2004 as a result of weakening steel prices and high costs, despite a jump in sales.

The sector reported 127.4 billion yuan (US$15.73 billion) in profits last year, only edging up by 0.96 per cent year-on-year, according to NDRC. The growth rate dived by 78 percentage points from 2004.

The worse was that profits of the nation's 66 largest steel makers tumbled by 10.62 per cent to 76.87 billion yuan (US$9.49 billion) last year.

However, sales of the sector surged by 30.09 per cent.

Moreover, domestic steel prices plunged by a quarter in December from the beginning of last year.

China has had superfluous steel production capacity as a result of excess investment in the sector in recent years.

The nation's steel production capacity totalled 470 million tons in 2005, much higher than a real crude steel output of 349 million tons in the year, according to NDRC. An extra capacity of 70 million tons is being built.

Last year, investment in the steel sector amounted to 228.1 billion yuan (US$28.2 billion), climbing by 27.5 per cent from 2004.

"Facing tougher conditions this year, the steel sector should speed up restructuring and remove backward production capacity," Jia Yinsong, an official from NDRC, told China Daily.

A slew of mergers and acquisitions took place last year within the sector led by the nation's major steel producers, such as Anshan Iron and Steel, Wuhan Iron and Steel, and Tangshan Iron and Steel.

China's steel output is forecast to decrease this year with slowing demand.

China Iron and Steel association said that the nation's crude steel output would rise by 10 per cent to 384 million tons this year from 2005. The expected growth is down from 24.6 per cent last year.

Recently, steel prices in China increased slightly.

For example, the nation's top steel maker Baosteel last month raised prices of its key products by 10 per cent for the second quarter of this year from the first quarter.

Nevertheless, analysts said that the price recovery was fragile.

"The recovery doesn't indicate the market glut has been alleviated," said Tian Shuhua from China Galaxy Securities Co Ltd. "Steel mills have to lift prices temporarily to deal with possibly more expansive iron ores."

Talks have reached an impasse between China and the world's top three iron ore producers - Rio Tinto and BHP Billiton from Australia, and Brazil's Companhia Vale do Rio Doce. The three miners expect an additional appreciation of iron ore prices after a 71.5-per cent hike last year, while China demands a price cut.

The steel association predicted China's iron ore imports this year would slow down because of swelling domestic production of the raw material and decelerating demand.

The nation's iron ore imports will grow by only 25 million tons this year from 2005, it said.

Last year, the imports jumped by 67.2 million tons to 275 million tons from 2004.

China saw robust growth in steel exports but a dip in imports last year.

The nation exported 20.5 million tons of finished steel products in 2005, up 44.2 per cent from the previous year.

In the meantime, its steel product imports fell by 11.9 per cent to 25.8 million tons.

Source: China Daily