Industry in period of low growth, overcapacity weighing on prices

BEIJING - China's steel industry is operating on a profit margin lower than all other industries, touching 3.5 percent, pushing the industry to reform its structure, a senior official said on Sunday.

"The industrial average profit ratio stood at 6 percent, while the steel industry is running on 3.5 percent profit, mainly driven by rising raw material costs, and overcapacity also weighed on steel prices," said Luo Tiejun, a senior official of the Ministry of Industry and Information Technology.

China's steel industry has entered a low-growth and slender-profit period, Luo said. He predicted that crude-steel consumption and production will increase next year, but not on a large scale.

The nation's crude-steel production could reach 630 million tons in 2010, up 10 percent from last year, he said.

China's daily crude-steel output rose in early December, when a large number of steel mills in Hebei province resumed operations after being ordered to shut down to meet energy-saving goals.

The steel price index rose only 33 percent from 2005 to 2010 while iron ore prices surged by 116 percent, Luo said.

The difficult situation will prompt the Chinese steel industry to reform its structure and upgrade the industry. The government plans to move some steel plants from inland to coastal areas and along the Yangtze River during the next five years, he said.

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China will also move some steel plants out of large and medium-sized cities to improve the environment, he said.

A 2009 report from KPMG, an international accounting firm, says that because of increasing environmental pressure and the need to control logistical costs, the nation will gradually move its steel production capacity to coastal areas.

Prices of Indian ore with 63.5 percent ore content remained at $175-$177 per ton on Monday, including freight, unchanged from Friday, after hitting that six-month peak in November, according to the industry consultancy Mysteel.

India, the world's third-largest ore exporter, which cut ore supplies to China, banned exports in July during a crackdown on illegal mining in southern Karnataka state.

Chinese steel mills turned to domestic iron ore because it was cheaper than imports.

Domestic ore output increased 24.4 percent year-on-year in the first 10 months, and iron ore imports dropped 2.2 percent over the same period, according to data from the China Iron and Steel Association (CISA).

Chinese steel prices will climb on inflationary pressure, but steelmakers will still be under operational pressure next year due to rising raw-material costs and overcapacity despite the country's massive investment, said Zhang Lin, an analyst with Beijing Lange Steel Information Research Center.

Chinese steelmakers' profits have been declining since April.

The average profit ratio of Chinese medium- and large-sized mills was 2.68 percent for the first 10 months of this year, much lower than the average profitability of other Chinese industries, said CISA Vice-Chairman Luo Bingsheng.