Steel industry eyes plans to resolve oversupply

The authorities are drawing up plans to resolve the steel industry's severe oversupply, an official at the China Iron and Steel Association said.

The plans are to improve the sector's competitiveness by eliminating obsolete capacity, upgrading production lines and offering support to combat excess capacity, a CISA source said on Wednesday.

"The National Development and Reform Commission and the Ministry of Industry and Information Technology are working closely with related government departments to solve the overcapacity problem plaguing the steel, cement, electrolytic aluminum, plate glass and shipbuilding sectors," CISA secretary-general Zhang Changfu was quoted by the China Securities Journal as saying.

The new policies will make it harder for companies in industries with excess capacity to obtain land, funding or environmental certifications, said Zhang.

Chinese steel producers' profit margins have been narrowing by the month. Major mills made an aggregate first-half profit of 2.27 billion yuan ($370 million), but they posted a combined loss of 699 million yuan in June, the first month this year that the entire industry was in the red.

Furthermore, the industry actually recorded an operating loss during the first half, with the shortfall offset by 4.3 billion yuan in investment proceeds and 3.8 billion yuan from non-core businesses.

Rapidly mounting steel inventories add to the bleak picture. CISA figures show stockpiles peaked at 19.97 million tons at the end of March.

Although inventories declined in the following months, total stocks as of end-June stood at 15.46 million tons, 30.1 percent higher than early January.

In addressing the supply glut of the steel industry, CISA also called for its member companies, especially large steel mills, to increase their buying volumes on the nation's iron ore trading platform, which would give the mills a bigger say in the world market.

China's first iron ore spot trading platform was officially launched on May 8, 2012, CISA said on Wednesday.

The platform was set up to change a situation in which iron ore pricing was dominated by the three iron ore giants and explore a more open, transparent and fair pricing system.

"In spite of China's large demand for iron ore, Chinese firms still have little say in the pricing mechanism, and the growing influence of the platform is expected to make some change to the status quo," said Zeng Jiesheng, an analyst with Mysteel.com, a leading provider of steel market information.

Steel prices have been on a downtrend since February. As of June 30, steel prices were down 6.45 percent from early January and down 14.69 percent from a year earlier.

According to Wang Guoqing, deputy director of the Lange Steel Information Research Center, low steel prices and high production costs are the major causes for steel makers' thinner profit margins.

"Major steelmakers' return on sales was 0.13 percent on average in the first half, and the ratio even swung to negative 0.23 percent in June," Wang said.