According to an urgent announcement circulated by China's Ministry of Industry and Information Technology, China's steel industry has been ordered to curb output with banks instructed to cut or even halt financing for steelmakers wanting to expand production regardless of market demand.
MIIT pointed out there is a severe glut in the country's steel sector. Calculations show output of 470 million tonnes is enough to keep a balanced supply and demand relationship in 2009, but total capacity eyes a surplus of 25% to 30% compared with actual demand.
The root for increasing capacity and oversupply lies in that steel industry experienced a short live recovery in this year beginning boosted by various stimulus policies and rising steel price encouraged capacity expansion in the sector. However, this has overburdened the weak market demand.
MIIT said in this round of production expansion, medium and small steelmakers played the dominate role. Few high-price materials stocks, flexible operation mechanism, inadequate environment protection implementation and little social responsibility enable medium and small steelmakers to resume production quickly and expand output blandly in virtue of cost advantage.
MIIT thus urged local governments to close obsolete iron-making, steel-making and steel-rolling lines and prevent the outdated capacities reviving. It has also asked commercial banks to cut or even halt loans to steelmakers who report obsolete capacities or expand productions blindly.
Mr Shan Shanghua secretary general of China Iron & Steel Association big steelmakers have all reduced outputs by 10% to 20%, including 20% by Wuhan Steel and 10% by Hebei Iron & Steel Group. Baosteel has also cut output by at least 20%.
Mr Hu Shunliang a representative with Ma'anshan Steel said "We only maintain 90% of the capacity. We would like to ensure a 100% production/sale ratio rather than a 100% capacity utilization rate. He said that MIIT's order would positively affect Ma'anshan Steel. He added that this will mainly wash out obsolete capacities. Most big steelmakers are in line with industry policies, energy saving and emission reductions and environment protection, while most small ones are not. We can benefit from the move."
An official from Handan Steel said "The market situation is that small steelmakers have supplemented the inventories which big ones have cleared up. MIIT's order thus will more restrict medium and small steelmakers. The official said that future output adjustment is subject to the allocation of Hebei Iron & Steel Group.”
Mr Wang Dayong secretary-general of Hebei Metallurgical Industry Association said "Steelmakers should cut outputs. He said that output reduction should be the self-imposed move for every steelmaker to uphold the price, no matter the government has asked or not."
Mr Wang noted many steelmakers turn to output competition against a backdrop of similar product, quality and market, in order to occupy or maintain market shares. This has caused a vicious circle of production-loss-production. He said that "This is obviously not a normal operation method. He believed production cutback could only be a temporary measure. Steelmakers should slough off the vicious circle and try to explore new market.”
(Source: Securities Times)
