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China to Freeze New Steel Project Approvals

08-14 14:33 Caijing

Steel oversupply is a serious problem, with annual production capacity of 660 million tons far exceeding estimated demand of 470 million tons.


By staff reporter Wang Qihua

(Caijing.com.cn) The government will freeze approvals of new steel projects for the next three years in a bid to curb overcapacity, Ministry of Industry and Information Technology chief Li Yizhong told a news conference August 13.

Li said oversupply is a serious problem, with annual production capacity of 660 million tons far exceeding estimated demand of 470 million tons. China will produce a record 580 million tons of prime steel in 2009, far above the government's target of 460 million tons, according to China Iron and Steel Association data.

The plan might hamper Baoshan Iron & Steel Co.'s (SSE: 600019) intention, announced in June, to raise annual production capacity to 50 million tons from the current 20 million tons by 2015.

China's largest steelmaker originally intended to partner with the Guangdong government to build a 69.6-billion-yuan plant in Zhanjiang. The plant was to have an annual capacity of 10 million tons, but a source close to Baosteel told Caijing August 10 that final approval might be difficult to obtain given the overcapacity problems and the steelmaker might reduce the facility's capacity.

However, Baosteel might still be able to achieve its target via mergers and acquisitions.

Twelve government departments are co-drafting regulations to stimulate M&A deals, Li said, adding that steelmakers should limit production to ensure that iron ore and other raw material prices stay within a reasonable range.

The ministry also pledged support for CISA in its negotiations with global iron ore suppliers.

Beijing has accused smaller, mostly privately-owned steel mills of bidding up iron ore prices via speculative purchases, ramping up production irrespective of demand and being relatively heavier polluters than their larger counterparts.

Smaller mills are the main target of the government's plan to cut 72 million tons of iron capacity and 25 million of steel capacity by 2011, with 10 million tons of iron and 6 million tons of steel capacity to be slashed in 2009.

Consolidation is also being encouraged to concentrate 45 percent of steel production in the hands of the top five players, most recently via the proposed takeover of Shandong-based Rizhao Iron and Steel, the largest privately-owned steel mill in China, by its state-run rivals. Hebei Iron & Steel Group also said in June that it will inject its assets into a listed vehicle within one year after the merger of three listed subsidiaries.

China has more than 700 steel enterprises, with the top 10 contributing about one-third of total output.

Full article in Chinese: http://www.caijing.com.cn/2009-08-13/110223785.html

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