The Ministry of Commerce released a research report in early August on supply and demand of 600 key consumer goods and 300 major commodities. It found that in the first five months of the year, 39 finished industrial products reported 19 percent growth in inventory; while market demand for textiles, home appliances and shoes decreased and oversupply worsened.

Three conclusions were drawn: that macro-control policies should continue, that enterprises should adjust product mixes and invest based on market demands, and that domestic consumption should be boosted.

Driven by soaring steel prices, a rush to invest in the sector has caused overproduction, and steel inventory in the first half of 2005 increased 32.9 percent year-on-year.

Steel prices began to decline in April, and in May-June the domestic price of steel products fell over 1,000 yuan (US$123) per ton, some below production and sale costs. Electrolytic aluminum and iron ore are also severely oversupplied.

Zhu Hongren, vice director of the National Development and Reform Commission's Economic Operation Bureau, pointed out that half-year industrial profits have seen a moderate drop compared to last year's high benchmark and returned to normal levels. But he warned that some report heavier losses and cannot maintain operations.

If the situation continues long term or worsens, it will affect steady economic development, he said. Decreasing profits in some sectors revealed the effects of macro-control measures as well as tough challenges ahead.

Zhu said government will further strengthen and improve macro-control measures and try to create a good environment for enterprises. He gave priority to curbing production capacity expansion in some sectors.

For 80 percent of textile products, supply already exceeds demand, with overproduction of middle and low end products resulting in fierce competition and price wars. Export tax, declining entrepot trade and trade conflicts with foreign countries have led them to rely more on the domestic market, meaning oversupply will be even more excessive in the latter half of the year.

Li Lingmin, vice general manager of China National Textiles Import and Export Corporation (Chinatex), said businesses should give more attention to product mix and quality improvement to raise their competitiveness. Fang Aiqing, director of the Ministry of Commerce's Department of Market Operation Regulation, said the ministry will publish regular supply and demand reports and provide timely information for domestic enterprises.

In the first half year, turnover of consumer good retail sales rose 1.8 percent and reached its highest point since 1997. But the influence of consumption is still low compared with developed economies. Growth in consumption of luxury goods slowed and saving increased in both rural and urban areas, which will influence market demand in the short term.

Recent falls in farm produce prices, together with soaring prices of agricultural raw materials and rising consumer prices in rural areas, make it difficult to improve farmers' incomes, which will influence consumption growth in rural markets.

To counter oversupply of some products and boost consumption, the report said the government should promote urban and rural income growth and reduce the gap between them; boost employment and social security; improve circulation of goods and consumer choice; quicken the pace of the service sector's development and strengthen consumption's role as a market force.

The report also forecast that, of 600 major goods, 172 could maintain a basic balance between supply and demand in the second half of 2005, with the rest oversupplied. Commodities, textile products and home appliances are the main items expected to be oversupplied, while energy products could achieve a balance.

Crude oil:
Refined oil supply is expected to continue to increase moderately and demand to grow steadily. Prices of refined oil products should remain high and firm. Crude oil demand is predicted to reach 310 million tons, up 6 percent on last year, and production should rise 3 percent to 180 million tons. The gap will have to be filled through imports, with the ratio of dependency on imports exceeding 43 percent, 2 percentage points higher than 2004.

Coal:
Coal production is forecast to reach 2.08 billion tons and demand 2.04 billion tons. Some products, like high quality steam coal, coking coal and brown coal, will be traded at slightly higher prices due to limited deposits and strong demand. The prices of ordinary coal products are likely to drop a little.

Steel:
Steel demand is expected to be 340 million tons and production 330 million tons. A total of 26 million tons of steel products may need to be imported and some products, especially those used as building materials, may be increasingly oversupplied, so their prices will fall gradually. Average prices this year should be a little lower than the previous year.

Autos:
5.83 million automobiles are expected to be produced, up 15 percent year-on-year, but market demand will only rise 12 percent to 5.75 million. Fierce competition, removal of import quotas, lowered customs, RMB exchange rate adjustment and rising fuel oil prices will result in a moderate fall in auto prices.

Building materials:
Most building materials will maintain a moderate rise in production and demand, but property market macro-control measures are forecast to lower demand growth more than that of supply, and excessive production will result in price falls. Cement production is expected to increase slightly to 1 billion tons, but demand may drop to 0.95 billion tons.

Nonferrous metals:
Nonferrous metal production is predicted to rise, but demand will shift from rapid to steady growth. Since supply and demand will be basically balanced, prices should fluctuate at a high level.

Grains:
Considering grain inventory and import, its supply is expected to be guaranteed.

Home appliances:
Demand could fall, but supply should still be robust, so prices will continue to fall.

Jewelry:
The report forecast that growth in demand for gold products and jewelry will remain robust for quite a long time.

(China.org.cn by Tang Fuchun August 16, 2005)