On May 14, the Ministry of Industry and Information Technology (MIIT) released an emergency note, which was internally issued on April 24, on curbing the excessive rapid development of China’s steel industry. Factual points are translated below. It is a very good summary about the current situation of China's steel industry.

The situation of the iron and steel industry

(A) Excessive growth of steel production. From January to March, the national output of crude steel was 127.44 million tons, up 1.4% year-on-year. Daily production in late February was 1.51 million tons, close to the daily production of 1.56 million tons, the highest level in history, achieved in last June, which was equivalent to an annual output of 550 million tons; March national average was 1.455 million tons per day, 36% higher than the lowest level of 1.07 million tons experienced early November last year, also higher than last year’s daily average of 1.37 million tons. At the same time, foreign iron and steel production showed a significant downward trend. January-March, the world’s 65 major steel producing countries, except China, produced 136 million tons of steel, down 37.3 percent year-on-year. China's steel output accounted for 48.3 percent of the world’s total from January to March.

(B) Steel export continued to decline. January-March export of steel products totaled 5.14 million tons, down 54.9 percent from last year, among which, March export was 1.67 million tons, declined 59.8 percent. January-March net export of steel billets was equivalnet to 1.12 million tons of crude steel, down 85.3 percent from last year. At this level, the expected 2009 full-year export of crude steel equivalent would be 4.52 million tons, representing a net reduction of 43 million tons from 2008, a huge number. In March, China experienced net import on crude steel equivalent basis for the first time in 3 years.

(C) Market price keeps dropping. Domestic steel price index gradually picked up from last November’s lowest 101.5 points, and reached 109 points early February. Thereafter, steel price kept dropping, and broke 95 points on April 17, below the 1994 level.

(D) Steel industry needs to reverse losses. January-February, the iron and steel Industry lost 770 million yuan, as compared with 25.5 billion yuan profit from the same period of last year. Large and medium-sized steel companies have suffered loss since last October for five months. 37.1% of these companies lost a total of 1.51 billion yuan January-February. Half of the large ones with more than five million tons of annual production capacity lost money.

Problems faced by the industry

At present, the steel industry faces an unprecedented grim situation, with issues and problems developed over the past many years being highlighted:

(A) Serious oversupply of total iron and steel, especially sheet and plate steel products. China in 2008 has reached crude steel production capacity of more than 600 million tons, output of 500 million tons, crude steel consumption of 452 million tons, up 2.89% year-on-year, and net export of 48 million tons of crude steel equivalent. Considering the effects of stimulating domestic demand and reducing indirect steel export, crude steel consumption in 2009 is expected to be 462 million tons, an increase of10 million tons from last year; net export, based upon January-February results, is expected to decrease 40 million tons. As a result, China in 2009 only needs 470 million tons of output to maintain a balance between supply and demand, which means an overcapacity about 25-30%.

Market analysis shows that steel plates and sheets have clearly performed worse than long products, meaning over capacity issue is more severe for plate and sheet products.

(B) Higher proportion of out-dated production capacity and blindness in resuming production. According to 2005 statistics, out-dated capacity was 114 million tons for iron production and 56.78 million tons for steel production. After several years of effort, about half of the out-dated capacity has been eliminated. According to the State Council’s recent "iron and steel industry restructuring and revitalization plan", all iron production with annual capacity below 72 million tons and steel production with annual capacity below 25 million tons will be eliminated by the end of 2011.

At present, small and medium-sized steel mills have quickly resumed production, and newly completed large-scale facilities are also planning to jump in. Both will further increase production capacity.

(C) Increase of iron ore import exaggerated operational risks. Last year, the steel industry imported a large amount of highly-priced iron ores, based upon over-optimistic forecast of future demand. Low steel prices and high iron ore costs were the major reasons for large-scale iron and steel enterprises to suffer losses.

This year, a slight improvement in steel market motivated a number of businesses and speculative traders to import a large amount of iron ore. China's pig iron production of 43.21 million tons in March represents an increase of 3.9% year-on-year. March iron ore import of 52.08 million tons, up 46.2% from last year, far exceeded the actual demand. Excessive import of iron ore increased the pressure on corporate cash flow and increased business risk.

Policy guidance and solution

Based upon the above facts, the MIIT requested relevant government organizations to work together, firmly curb excessive output growth, shut down out-dated capacity, prevent further expansion of unneeded capacity, help companies to adjust product structure, invest in new technology, improve business management, discourage speculation, and crackdown on illegal competition.

Another peice of relavent information

According to the data release by General Administration of Customs last Tuesday, Iron ore imports in April reached 57 million tons, up 14.7 percent month on month and 33.2 percent year on year. The head of the China Iron and Steel Association on Thursday blamed speculators and strong demand from the small steel mills for pushing iron ore imports to a record high in April.