Commodities | Jul 03 2006
By Chris Shaw
In recent years the Chinese government has introduced a series of measures designed to limit the growth in steel production, all of which have met with limited success. As a result the country’s steel industry now suffers from huge excess capacity, as production is currently about 470m tonnes per year and there are plans in place to add about 150m tonnes of annual production to this amount, compared to annual consumption of closer to 350m tonnes per annum.
This has caused problems not only for China but for the global steel industry, pushing down prices and forcing capacity closures as margins are squeezed in other countries. With China producers still planning to expand capacity, China’s National Development and Reform Commission (NRDC) has proposed the introduction of further reforms designed to tackle the problems this excess capacity is causing.
The NRDC’s latest measures include restrictions on water, power, iron ore and loans to steelmakers at the lower end of the production efficiency curve, the target being the elimination of 55m tonnes of annual capacity by 2007 and a total of 100m tonnes annually by 2010. This would be achieved by the closure of as many as 360 mills throughout the country, many of these in the Northern provinces, where water is scarce.
It would also result in production growth slowing to less than its current rate, which at around 9% currently is close to the rate of GDP growth for the economy as a whole.
Part of the desired outcome would be achieved through a clampdown on illegal mills and unauthorised capacity expansion, while the rest would be through the absorption or closure of inefficient producers through additional mergers in the sector.
It suggests as part of its plan to increase the number of mergers that the government offer more by way of incentives for companies agreeing to merge, with tax incentives suggested as a major inducement.
That is unlikely to be the only benefit for the industry, as the China Metallurgical Industry Planning & Research Institute has said mergers are necessary to fend off large overseas predators such as Mittal, which is now the world’s largest steel company following its recent takeover of Arcelor. The acquisition has implications for the Chinese market, as Mittal currently holds a 30% stake in Valin Steel Tube & Wire Company, while Arcelor had large shareholdings in both Baosteel (China’s largest producer) and Laiwu Iron & Steel Company. Mittal is expected to consider further acquisitions in China assuming it can gain approval for such moves.
The NRDC’s ultimate goal is for the industry to be centred around three major producing groups each with the capacity to produce more than 30m tonnes annually, in addition to a number of smaller producers with capacity of around 10m tonnes per annum.
Such an outcome would be of benefit to producers and industry participants globally, as a smaller number of larger producers would be better able to control production levels, making steel prices more sustainable and therefore less subject to the large price swings seen over the past 6-12 months.