Excess capacity, low industrial concentration and a lack of access to
natural resources have long plagued
China
's steel sector. These problems have been exacerbated by the impact of the
global financial and economic crisis.
When
China
's State Council, or Cabinet, approved a "rejuvenation plan"
January 14 to support the troubled industry, the immediate aim was to deal
with the effects of the crisis. However, analysts said, it could also ease
the industry's long-term structural problems.
Since the plan was announced, construction steel prices have risen
about 60 yuan (8.78 U.S. dollars) to about 3,650 yuan per ton in
Beijing
and
Tianjin
, according to a steel information service company.
Prices had been rising since the government's 4 trillion yuan
economic stimulus package was announced in November.
From Jan. 14, when the industry package was announced after the
market closed, and Monday, the Shanghai Composite Index rose 3 percent.
Meanwhile, shares in the biggest steel producer, Baosteel, were up 2.5
percent while the No. 2 producer, Angang Steel, saw its stock rise 3.6
percent.
Chu
Xueliang
,
an analyst with China Jianyin Investment Securities, said the support
plans would help solve the persistent problems of excess capacity, low
industrial concentration and a lack of raw materials.
First, cut capacity
An analyst said
China
would consume about 500 million metric tons of steel, assuming the economy
grows 8 percent this year. Last year's consumption was estimated at 451
million metric tons.
But capacity exceeded 650 million metric tons at the end of 2008,
meaning producers were making too much steel even before the full impact
of the crisis was felt.
Analysts believe the global crisis and its impact on
China
have yet to run their full course, and demand abroad for
China
's steel products remains weak.
They fear that even small signs of price recovery will prompt
shuttered factories to resume production, which would exacerbate
overcapacity and weaken prices again.
Then,
restructure
Low industrial concentration is another problem.
China
's steel sector is big but not strong.
Based on 2007 figures, Chu says,
China
's top 10 steel producers accounted for just 36.8 percent of the nation's
total. The top five producers turned out about 20 percent.
By comparison, according to the International Iron and Steel
Institute, the world's single largest producer, Luxembourg-based
ArcelorMittal, produced 10 percent of the world's steel in 2006.
With more than 700 companies, many with extremely low output,
China
is the world's leading steel producer. According to the World Steel
Association, in 2007 (the most recent year for which figures are
available),
China
produced almost four times as much as the second-largest producer,
Japan
, and almost five times as much as the No. 3 producer, the
United States
.
China
accounted for more than one third of 2007 global production.
Raw
material remains problem
Something largely beyond
China
's control is its need for imported raw materials, such as iron ore. The
only market power it has in this area is the power to negotiate with
suppliers.
Leading steel companies such as Baosteel and Wuhan Iron and Steel
each import about 70 percent of their iron ore. However, the huge number
of small producers complicates negotiations with iron ore suppliers such
as
Australia
, because the industry doesn't negotiate as a bloc.
New
support package
The State Council announced support programs last Wednesday for the
vehicle and steel sectors, two of the many industries for which the
government is expected to announce specific support packages.
Chu
said the steel industry plan includes eliminating obsolete capacity,
speeding up innovation, promoting alliances and mergers and cutting export
tariffs.
Regulations will favor larger, more efficient blast furnaces with a
capacity of at least 1,000 cubic meters of ore. Those with capacities
under 400 cubic meters should be closed.
Chu
says about 100 million tons of obsolete capacity could be closed by this
method, and he expects to see the impact show by 2010.
The government will subsidize loans of about 15 billion yuan to
encourage technological upgrading and product rationalization to better
meet demand.
Chu predicts
China
will eventually have six steel giants, each with an annual output
exceeding 200 million tons as the support programs give companies a great
opportunity to merge with or acquire other companies, which would increase
industrial concentration.
Export tariffs on 67 steel products were scrapped Dec. 1 to ease
pressure on exporters, according to the China Iron and Steel Association (CISA).
But
Chu
says industrialists are still hoping for further tax cuts, rebates or
exemptions, and it is likely that some of these steps will be taken.
A UN report in December forecast the world economy would only grow
1 percent in 2009, 1.5 percentage points less than in 2008.
A slower global economy would mean reduced demand for steel -- not
just in raw form, but also in motor vehicles and household appliances.
Faced with these multiple challenges, the CISA says steel producers
must match production with demand and avoid below-cost exports.
Xinhua |