October 9, 2008

4 Chinese Steel Makers Plan to Trim Production

Four big state-owned Chinese steel makers have agreed to cut production by as much as 20 percent, perhaps until year-end, in an effort to put a floor under falling product prices, a Chinese industry official said on Wednesday.

The four - Shougang Group, Hebei Iron & Steel Group, Anyang Iron & Steel and Shandong Iron & Steel - agreed this week to reduce output by 10 percent to 20 percent, said the official, Zou Jian, chairman of the China Metallurgical Mines Association.

"The steel price declined a lot, so the steel companies decided to cut production until steel prices are stable," Zou said.

The four companies have a total capacity of about 100 million tons, almost a fifth of China's estimated production this year, which is expected to reach 520 million to 550 million tons.

The cuts would make a dent of about 34 million tons in the amount of iron ore China uses, Xinhua, the official Chinese news agency, estimated in a report last week.

China's top steel maker, Baosteel Group, plans to produce 30 million tons of crude steel this year, up 5 percent from 2007. A senior manager at its listed arm, Baoshan Iron & Steel, which accounts for most of the group's volume, said the listed entity was on track to meet its own target.

The rapid growth of China's economy has set off a feverish hunt for iron ore over the past three years. But the slowing global economy and the end of the Olympic Games, which required a huge construction effort, have cut demand for steel.

Thomas Wrigglesworth, an analyst with Citigroup, said in a note to clients this week that Chinese steel prices had fallen about 17 percent from their peaks in June and July.

"We think that this is the result of demand destruction, which has precipitated from the combination of reduced ability for businesses to borrow and expand in a rising steel and commodity price environment," he said.

"The question now remains at what levels prices will stabilize. Producers are now being forced to cut production, and we think that the economics will force producers to leave the market. Currently spot prices remain below marginal cost, implying that we are still some way off equilibrium."

The steel slowdown, together with a pileup of iron ore stocks in China, has undermined the shipping market, which had enjoyed a boom because of Chinese trade. The Baltic Dry shipping index has tumbled from 11,793 in May to 2,922 on Tuesday.

"Iron ore imports may decrease but won't stop," said Zou, the industry official. "China needs to import half the iron ore it uses for its steel production."

Originally published by Reuters.

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