China's steel output may slow in 2006

Staff -- Purchasing, 10/6/2005

China's steel-production growth may slow starting in 2006 if the government follows through on a decision to close plants that fail to meet the nation's new industry guidelines. That's the view of analyst Jim Lennon at Macquarie Bank's London office, who believes China will be successful in closing down hundreds of small producers with a combined annual capacity of 55 million metric tons.

The government has been trying to curb expansion in the industry after steel output doubled in the past four years, driving up global prices of iron ore and coal to record highs and fueling home-country inflation. The country announced a policy in July that will shut small, polluting mills and force industry mergers. The expected shutdowns suggest "the phenomenal growth rates we have recently seen in China's steel output should begin to slow significantly next year,'' the Macquarie report says.

China is expected to boost steel output by 13% to 390 million tons in 2006 after a 26% increase to 345 million tons this year, the report forecasts. The International Iron and Steel Institute says total crude-steel production in China of 193.8 million metric tons the first seven months of 2005 is a rise of 28.1% on the same period of 2004. The expanded output this year is contributing to an 8% decline in prices since December. The average price for steel products in China was $603 a metric ton at the end of July, according to the State-Owned Assets Supervision and Administration Commission.

China's steelmaking capacity is between 400 million metric tons (estimated by the country's top economic planning agency) and 419 million metric tons (estimated by the China Iron and Steel Association). The uncertainty exists because while 22% of steelmaking plants are owned by the state and 34% are held by publicly traded companies, the other 37% are controlled by private companies. Lennon says many smaller private operations have never reported accurate steelmaking capacity. Atop all that, another 119 million metric tons of annual capacity is planned or under construction through to 2008, including 71 million set to start operation by end-2006. The Macquarie report suggests that 36 million metric tons of that capacity is unlikely to receive approval under the new steel industry policy guidelines.