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China steel sector needs consolidation to shrink glut: executive

[BEIJING] Consolidation is vital for China's steel sector to shrink a supply glut that has depressed prices and saddled dozens of firms with heavy debts, a senior executive told Reuters.

The Chinese government is drafting policies aimed at shrinking surplus steel capacity estimated at more than 300 million tonnes a year, and is likely to include another attempt to encourage mergers and acquisitions in the sector.

"China has hundreds and thousands of steel enterprises - this isn't feasible and it needs to consolidate into a few large ones," Deng Qilin, chairman of state-owned Wuhan Iron and Steel Group (Wugang), China's fourth-biggest producer, told Reuters.

Steel prices fell 28 per cent last year, due to overcapacity and economic slowdown. Steel consumption in China, the world's largest producer and consumer of the commodity, also shrank for the first time in three decades in 2014.

Beijing had aimed to bring at least 60 percent of nationwide steel capacity under the control of its 10 biggest steel firms by the end of this year, but that target has been absent from its policy statements since 2013.

In a 2014 policy document, China promised to simplify approval procedures and improve financing for mergers and acquisitions, but the slowdown has made it harder for the government to persuade large steel firms to take over rivals.

But Beijing has been accused of strong-arming state firms into pursuing unprofitable mergers, and some executives have said the approach worsened the country's supply glut and lumbered bigger firms with debt.

Mr Deng said further reform of the steel industry was crucial, and he also called for more of China's excess production capacity to be shifted overseas.

"There is capacity that we can shift abroad, to regions that need it like South East Asia, Eastern Europe, and places like Indonesia and Africa where demand for steel is huge but production capacity very low," he said.