Wednesday, October 05, 2005

China Steelmaking Capacity Balloons

Global Industry Group Fears
Buildup Could Hurt Prices
Despite Growth in Demand

October 4, 2005; Page A6

SEOUL -- World steel industry leaders are worried that mounting overcapacity in China could push down steel prices at some point, despite continued steady demand growth for their products world-wide.

"In coming years, there will be massive, massive excess capacity" in China, said Nicholas Lardy, an expert on China and a senior fellow at the Institute for International Economics in Washington, in a speech to a group of steel industry executives at the International Iron and Steel Institute annual meeting, which is being held in South Korea this week.

China added about 50 million metric tons of steelmaking capacity in 2004 and will add more than that in 2005, taking that country's annual steelmaking capacity to roughly 400 million tons, according to Mr. Lardy. That is enough to meet the country's annual demand until 2015, he said. Mr. Lardy said government efforts in China to consolidate steel capacity and limit expansion could take longer than expected, largely because of resistance from Chinese provincial governments that seek to foster local steelmakers.


The Chinese buildup comes at a time when producers have stumbled in efforts to curb capacity growth elsewhere in the world by cutting back on subsidies paid by governments. Talks at the Organization for Economic Cooperation and Development in Paris aimed at ending state subsidies have fallen apart as trade representatives couldn't agree upon how to implement changes. "These [talks] are not likely to restart in the near future," said Ian Christmas, secretary general of the IISI. "We believe it is still a real issue that, at some stage, if we want a competitive dynamic and open business, we have to address."

In addition to China, steel companies also are grappling with lofty prices for raw materials and energy and face growing competition from rival materials such as plastics, aluminum and cement in key markets such as automotive and containers. And yet, the industry is also enjoying one of its strongest periods of prices and profits as the result of a global commodity boom.

"We are in a very prosperous industry and we believe the outlook for next year is very positive," said Mr. Christmas. "We are not saying it is all gloom and doom. We are saying there are risks and dangers going forward."

Mr. Christmas criticized the world's three largest iron ore companies -- Brazilian mining giant Companhia Vale do Rio Doce, or CVRD, Rio Tinto and BHP Billiton -- for having a natural monopoly with 70% market share for iron ore shipped across the oceans. Steelmakers use iron ore as an ingredient to melt in their furnaces, mixing it with other materials, to create steel.

"Their current market behavior could be a threat to the long-term competitive position of steel," said Mr. Christmas. He and other executives said the organization doesn't plan to raise anticompetitive issues against the iron ore industry at international trade bodies. Instead, he said, steel companies and others are seeking to buy up iron ore mines and bring more iron ore into supply. Mittal Steel Co. of the Netherlands, for example, is pursuing iron ore mines in Liberia.

The IISI estimates steel demand in 2005 stands at 998 million metric tons, up 3% globally from 2004. It expects demand to grow even more in 2006 with an estimated 1.04 billion tons consumed, up 4% or 5% from 2005.


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