China has warned that demand for steel is falling as the country takes steps to cool its red hot economy, posing a risk for mining companies plowing ahead with bold expansion plans to increase production of key steelmaking ingredients.

But industry officials said production will decline in the second half of the year due to weaker demand for flat steel products used to make everything from cars to home appliances. Mr Zhang Changfu secretary general from the China Iron and Steel Association said that "The growth of the auto, shipbuilding and engineering machinery sectors is declining, and that indicates demand for steel will drop more."

China has raised interest rates and curtailed credit repeatedly in a bid to cool inflation and the country's charging economy. Growth slipped to 9.5% in the second quarter, down from 9.7% in the first.

While China's economy is still performing at near double digit growth rate so far this year, even a small decline in economic activity has wide reaching implications for the global economy given the country's status as the world's second largest economy and the growth struggles experienced by North America and Europe.

If China's caution over steel consumption spreads to other commodities and extends into next year, it could force mining companies to delay projects or pull spending, which is what happened during the global economic meltdown in 2008-09. However, if softer steel demand in China proves to be a temporary hiccup, miners will be even better prepared for a pickup in production with growth plans already in place.

Mining companies are relying on China to keep consuming commodities that help feed its infrastructure build out. It was China that pulled mining companies out of the recession and into the current period of strong demand and prices for commodities. Despite an expected pullback in demand from China later this year, miners and many analysts believe long term demand for steel and its raw materials will remain healthy.

Ms Jennifer Tkachuk Tremblay analyst at Scotia Capital said that "Demand for iron ore and coal is expected to remain high as emerging economies pursue urbanization. In the short term, however, we anticipate some volatility in demand."

Today, miners are using their excess cash from record metal prices to further grow production, either through expanding operations or buying up other companies.

(Sourced from www.reuters.com)