China's iron and steel industry is set to be transformed in the near future, as the central government will soon introduce a new industry policy to regulate the fast-expanding sector. The executive meeting of the State Council chaired by Premier Wen Jiabao on Wednesday gave the go-ahead to the long-awaited China iron and steel industry development policy.

"Before the policy is finalized , the top decision makers will need to make some adjustments to the specific rules based on feedback from the government's different departments," Li Xinchuang, vice-president of the China Metallurgical Industry Planning & Research Institute (CMIPRI) told China Daily last week in a telephone interview.

Li has participated in the drafting of the policy since 2002.

"It will be finalized quite soon, as the main points have been hammered out by the top decision maker ," added Li, who indicated the policy would be finalized within a matter of weeks.

Last week's executive meeting warned that China's on-going industrialization and urbanization has greatly increased the country's demand for iron and steel products, but excessive and unregulated investment in the essential industry risks creating an imbalance in overall economic growth, the waste of energy resources and severe environmental pollution .

China produced 270 million tons of steel last year, making it the world's largest steel producer, to satisfy the 50 million-ton increase in demand from 2003.

The industry policy, a guideline for the long-term development of China's iron and steel industry, aims to increase the concentration of steel production by the large State-owned steel makers such as Baosteel and to boost the industrial upgrading of the steel sector through new technologies and management and production efficiency.

As a long-term strategy, the policy will not have an immediate impact on the country's economy, but will have a "far-reaching influence on China's iron and steel industry," said Qi Xiangdong, vice-secretary-general of the China Iron and Steel Association.

"The country's steel production this year, which is expected to top 300 million tons, will not be affected by the new policy, " said Zhou Xizeng, a senior steel analyst with CITIC Securities.

"The policy is conducive to the industry's sustainable and healthy development in the long run," said one of its drafters, CMIPRI's Li.

Li said the policy covers very detailed aspects of the steel sector, from corporate management to government macro-controls, and is "very comprehensive and feasible."

Several auxiliary regulations might follow the issuing of the principal guideline, say industry experts.

The National Development and Reform Commission, China's top policy planner, is working on a steel industry development plan by 2020, according to Wu Pengfei, an industry analyst in steel with Beijing-based Guotai & Jun'an Securities.

Also , the central government will cut the steel export rebate rate from the current 13 percent to 11 percent from May 1 after the elimination of the steel billet export rebate on April 1, in a move to reduce exports of the high energy-consuming products, say insiders.

"This (the export rebate cut) can be taken as a measure accompanying the industry policy," said Zhou. "But the move will not have an obvious impact on steel exports this year, because the reduction in rebate rates is very slight," he added.

China exported 14 million tons of steel last year, more than double the figure of 2003, according to Zhou, who said it would be hard to predict the steel exports for this year because of volatile factors such as the price hike of iron ore.

Zhou predicted the government might go further and remove the steel export rebates, but did not give a specific timetable.

CMIPRI's Li argued the government, by adjusting the steel export policies, should try to create conditions for China's steel makers to compete fairly in the international market.

In order to bolster scale production in the steel industry - which is implied in the policy, the country plans to increase the proportion of China's 10 largest steel makers' turnover amongst the total steel production to 50 percent by 2010, and expects the figure to reach 70 percent by 2020, according to Li.

To date, 15 steel companies in China have boasted an annual production of at least 5 million tons of steel each, revealed sources from the industry's association, and they yielded 45 percent of the country's steel products last year, .

China's largest steelmaker, Baoshan Iron & Steel Co Ltd (Baosteel), earlier this month announced its long-awaited additional share offer plan, with an aim to raise 25 billion yuan (US$3 billion) to acquire steel mills, raw materials, logistics and trading assets from its parent company Baosteel Group.

After the acquisition, Baosteel will take over the vast majority of its parent company's steel making capacity, making it the world's eighth largest steel manufacturer, and increasing the company's profit by as much as 37 percent to 12.9 billion yuan (US$1.56 billion) this year.

The government's move to nourish the large State-owned steel makers will lead to a round of shut-downs of the country's small steel companies, as well as many merger and acquisition cases in the steel sector, estimate some industry insiders.

"According to the requirements for steel producers specified in the new industry policy, a large number of medium and small-sized steel companies are facing being closed down," said CITIC's Zhou.

"And the alternative, if not the shutting-down, might be mergers and acquisitions by the larger steel market players," he continued, saying the government might not want to lose too many small producers in order to maintain the backbone industry's stability. " The industrial shake-ups are to be on a gradual basis," Zhou added.

The new policy sets new requirements for steel makers in China in a number of different areas including the scale of production and efficiency, technical expertise, energy consumption and environmental protection performance. According to the policy, a raft of market measures such as tax rebates will also be introduced to promote the high value-added steel production .

However, Zhou's predictions are challenged by some other industry insiders.

CMIPRI's Li said the policy is not likely to result in a large number of closedowns of small steel makers or mergers and acquisitions in the sector, but will lead to the upgrading of old steel production equipment in these companies.

"The outdated facilities in many small steel firms are the main factor holding back their production capacity and account for their huge energy consumption," Li explained.

A small steel company in North China's Hebei Province said the new industry policy will not make a great impact on their current operations in the short term, as the government's macro-controls - which are in accordance with the new policy - have long regulated the sector.

The company vows to improve their technologies and management through intensified research and development and in partnership with bigger producers.

The new policy, which indicates a further restructuring of the steel industry in the future , is estimated by some insiders to provide opportunities for foreign investment to merge with or acquire local companies.

But the possibility of a large influx of foreign capital into the country's steel industry is slim, say some analysts, because the foreign steel makers might be confronted with setbacks from the central government's tight project approval.

"We still have a requirement for foreign (steel) makers to enter the Chinese market, although the government encourages foreign investment to tap the deep-processing sector of China's steel industry, which will also enhance the local firms' production and management," CMIPRI's Li said.

(China Daily April 25, 2005)