China's steel over-capacity to persist

China's crude steel capacity reached 660 million tonnes at the end of 2008, vastly exceeding this year's expected output of 490 million to 500 million tonnes, senior officials from the China Iron and Steel Association said.

The scale of production this year, which will likely fall just below 500.5 million tonnes in 2008, depends on whether China's economy can stage a recovery in the second half, since export markets are likely to continue to be weak, Luo Bingsheng, Secretary-General of the association, told agencies.

The Chinese steel industry's direct or indirect reliance on exports is about 23 per cent, underscoring the sector's vulnerability to a global economic downturn, Luo said. "A lot of people don't realise this, but our steel industry is deeply dependent on outside markets," Luo told reporters. "Some people may view demand as reviving [because prices recovered in January], but I don't. The imbalance in supply and demand will continue to create an unstable situation."

Only additional government measures to stimulate demand will allow the Chinese steel market to regain its feet, he said.

Over-capacity is expected to be a problem for mills making hot-rolled and cold-rolled steel, Luo said. "Hopefully the situation can improve in the second or third quarter."

Chinese mills expanded into those products in response to high prices in previous years, and were encouraged to do so by government policies that supported investment in higher-value steel making capacity. Only about 30 per cent of Chinese mills managed to avoid losing money as steel prices crashed in October and November, Luo said.

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