Steelmakers grow, overcapacity worsens

Chinese steel companies are growing despite widespread losses and the government's efforts to thin the sector.

Since overtaking Japan to become the world's largest steel producer in 1996, China's steel production reached new heights in June with record -high averages for daily crude steel output. But the country's soaring steel production came as the sector struggles with overcapacity and losses amid an economic slowdown.

The country's average daily output reached 2.31 million tonnes in June, up 1.7 percent from the previous month, according to the latest data from the National Bureau of Statistics (NBS).

Total crude steel output in June was up by 4.5 percent from last year at 69.29 million tonnes, according to the NBS.

The output of pig iron, an intermediary product in steelmaking, also rose 2.3 percent to 60.01 millon tonnes in June, while rolled steel production expanded by 7.1 percent to 98.05 million tonnes.

In the first six months, China produced 411.91 million tonnes of crude steel, or 3 percent more than a year ago. In the same period, pig iron output grew 0.5 percent year on year to 362.02 million tonnes while rolled steel production increased 6.4 percent to reach 552.25 million tonnes.

While output grew, profits from steel production have been sluggish. Combined profits of Chinese steel companies in the first half rebounded to 2.27 billion yuan (about 370 million U.S. dollars) following a loss of 2.33 billion yuan in the first quarter, according to data by the China Iron and Steel Association (CISA).

However, their steelmaking operations incurred huge losses that were offset by 4.32 billion yuan in investment revenues and 3.88 billion in non-operating income.

The record-high production capacity indicated the government's efforts to rein in the sector's growth have been in vain.

This month, the Ministry of Industry and Information Technology (MIIT) again ordered the steel sector to eliminate laggard and excessive capacity by as much as 46.86 million tonnes by the end of September.

According to the MIIT plan, 44 iron smelting companies and 30 steel smelting enterprises must eliminate substandard and excessive capacity.

"Currently, we are in an oversupply situation, so the decree is good for the entire steel sector's future development," said Yi Peng, director-general of PanGoal, a public policy research institution.

Overcapacity has long been a problem for China's steelmakers, which have not only been blamed for polluting China's air, rivers and soil, but for impeding economic restructuring.

Data from the China International Steel Congress showed the steel industry now has excess capacity between 180 million tonnes and 240 million tonnes.

Yi said administrative decrees won't help cut excess capacity if the government continues to overreach by retaining the power for steel project approval.

"We should let players fully compete in the market, which will help find the equilibrium point at which malfunctioning enterprises go bankrupt," Yi said. Yi added that the country's steel companies need to move up the value chain as China still relies heavily on imports for sophisticated steel products.

Li Xinchuang, executive deputy secretary-general of CISA, estimated that the sector needs five to ten years to eliminate the excess capacity.

"It's urgent to control output for the entire sector," Li said. "If this grim situation continues, enterprises that fail environmental standards or those with little liquidity will be knocked out first."