China steel price rally won't halt capacity cuts: state planner

[SHANGHAI] The recent rapid improvement in Chinese steel prices is not sustainable and will not hinder the country's efforts to tackle overcapacity in the sector, a government official said on Thursday.

"Rising steel prices have some impact on cutting overcapacity, but in general the impact is very small," Zhao Chenxin, a spokesman with the National Development and Reform Commission (NDRC), told a media briefing in Beijing.

After hitting their lowest point in decades last year, steel prices surged 80 per cent from late November to their recent peak on April 21, but have since fallen back around 25 per cent.

Mr Zhao said optimism over steel demand has been driven by rising housing sales, a resumption in construction activities and restocking by traders. Lower production rates earlier this year and futures market speculation also helped lift prices, he said.

"The supply and demand situation hasn't essentially improved, and the serious overcapacity hasn't changed, so steel prices will be unlikely to maintain the rapid increase," he said.

The higher prices have encouraged some shuttered steel mills in the world's top producer to resume production, and leading steelmaker Baoshan Iron & Steel warned this could slow government efforts to curb overcapacity in the short term.

"The restarted capacity is not on the list of those (mills) that have been ordered to shut down, and the reopening is normal market behaviour, mainly in reaction to market changes," Mr Zhao added.

Beijing would continue to urge local governments to push forward steel industry capacity cuts and take reasonable measures to accelerate closures, he said.

China's top steel-producing region of Hebei province has banned the reopening of steel mills that have been officially ordered to shut down.

China is also drawing up special plans aimed at disposing of so-called "zombie enterprises" and will also include new mechanisms to handle their debt, the official China Securities Journal reported this week. Pilot programmes were due to be launched in around 20 cities.

REUTERS