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 Mysteel, 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

Analyst Rong Gang, of Langesteel, a steel information service, 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 News Agency January 22, 2009)