SHANGHAI - China, the world's biggest steelmaker, should produce more high-grade alloy to meet demand arising from increased investment in railways, nuclear power plants and other major projects, a government adviser said.

"We should produce stronger, lighter steel products and those that better withstand corrosion", as part of the 12th Five-Year Plan (2011-2015), said Li Xinchuang, deputy general-secretary of the China Iron & Steel Association.

China is investing 800 billion yuan ($121 billion) to build 6,000 kilometers of high-speed rail lines by 2012. It also plans to spend 5 trillion yuan on clean energy, which will increase demand for high-grade steel and benefit producers such as Xining Special Steel Co and Xinxing Ductile Iron Pipes, analysts said.

Consumption of specialty steel may "increase steadily" as China needs more springs, fasteners and bearings for use in railways and machinery, said Xu Xiangchun, chief analyst with Mysteel. Nuclear power plants and windmills need heavy plates and high-strength stainless steel.

Increasing production of higher grades would boost earnings for Chinese steelmakers, who suffer from the lowest profit margin of any domestic industry because of high costs and overcapacity, according to the Ministry of Industry and Information Technology.

The whole steel industry's profit margin was about 3.5 percent in 2010, according to the ministry.

"Making higher grades would help boost steelmakers, especially the profits for the bigger mills because they have the research resources to develop technologies," Mysteel's Xu said. "The profit margins of smaller mills have outpaced some larger rivals in the past years because of a construction boom."

Related readings:  China's steel industry head retires  Industry steels itself for change in next 5 years  China's steel industry to face tougher times in 2011  Steel industry plan forged

The nation's largest steelmakers, including Baoshan Iron & Steel Co, Angang Steel Co and Wuhan Iron & Steel Co, currently focus primarily on the production of ordinary flat steel.

China's steel output, which has doubled since 2005, may slow to grow at 5 percent in each of the next five years, according to Mysteel. Steel product imports fell 6.8 percent to 16.4 million tons last year, partly as local producers boosted output of higher grades. Chinese mills should continue to seek to displace imports, Xu said.

China also wants steelmakers to merge to boost their ability to compete overseas and bargain with suppliers. Still, the government has pulled back from encouraging them to become as large as the global leader, ArcelorMittal, and instead has directed mills to focus on improving product quality, said Li, who is helping to draft the nation's steel policy.

China may order its top 10 producers to make more than 60 percent of the nation's steel by 2015, compared with 48.6 percent in 2010, Xu said.

The government may announce the industry's 2011-2015 plan after the annual session of the National People's Congress, China's legislature, which starts this week.

It's probable that there will also be tighter limits on energy savings, carbon and other emission reductions for steelmakers in the Five-Year Plan, Li said, without elaborating. Between 20 and 30 percent of Chinese steelmakers have yet to meet these criteria, Mysteel's Xu said.

Bloomberg News