Shanghai Baosteel Group Corp, China's largest steel producer, yesterday dismissed speculation there is a bubble in the domestic steel industry, saying there is still potential for production growth.

Xie Qihua, chairwoman and president of Shanghai Baosteel Group Corp, denied Baosteel plans to raise prices, even though it is bearing the brunt of more expensive iron ore.

"We will keep the steel price stable. We will cut back production costs while establishing a long-term strategic relationship with downstream users," said Xie on the sidelines of the Fortune Global Forum yesterday.

Speaking at a panel discussion, Xie said China's demand for steel has been robust, justifying the production increase last year.

"Even though consumption was rising fast, the stocks remained stable. This indicates the demand is real," said Xie.

The comments came as the government is cracking down on rampant production capacity expansion in the sector.

The government is restricting land allocation and loans to most steel manufacturers, and has even suspended the construction of some new projects. It is concerned the sector is expanding too quickly, eventually leading to a market glut and waste of energy.

Xie explained the government is restructuring the sector by controlling production expansion at the low-end of the market.

Even though the government has reined in blind investment in small, inefficient steel mills, it still supports investments made by large steel makers in projects targeting the high-end market, she said.

According to Xie, China still needs more steel to keep the economy steaming ahead.

In the United States, accumulated steel consumption is 7 billion tons, compared with 1.7 billion tons in China, she said.

As the nation plans to quadruple gross domestic product between 2000 and 2020, demand for steel will explode, said Xie.

China, the world's largest steel maker, produced 273 million tons last year, accounting for a quarter of the global total.

Consumption increased by 13 per cent last year to 258 million tons, or a third of worldwide consumption.

Favourable steel prices and robust demand have encouraged many steel makers to pour billions of US dollars into building new smelters to cash in on market growth since last year.

Last month Ma Kai, minister of the National Development Reform Commission, China's top economic planner, warned potential capacity could exceed demand.

"The redundant expansion at the low level must be curbed," said Ma.

According to Xie, China's steel production is expected to reach more than 300 million tons this year, while consumption will reach about 310 million tons.

The prediction is more conservative than that of the China Iron and Steel Industry Association, which expects production to rise by at least 16 per cent this year to 345 million tons. Demand is forecast to rise by 10 per cent to 343 million tons.

(China Daily May 19, 2005)