Steel output in China may rise 10 percent this year, worsening a domestic oversupply in the world’s largest producing nation, the China Iron & Steel Association said yesterday.

Production may rise by 50 million metric tons to 550 million tons, the
association also known as CISA, said in a statement today on its Web
site. China may import as much steel as it exports this year, compared
with net exports of 48 million tons last year, it also said.

Benchmark Chinese steel prices have fallen 20 percent from a 10-month
high on Aug. 4 as production overwhelmed demand fueled by the nation’s
4 trillion-yuan ($586 billion) stimulus spending. Baoshan Iron &
Steel Co., China’s biggest mill, said yesterday fourth-quarter profit
would be hurt as mills slashed prices amid higher inventories.

“The oversupply problem will be worse if China’s steel output exceeds
550 million tons,” the Beijing-based association said in the statement.
Higher steel output and reduced exports is having a “huge impact on the
domestic market,” it said.

Steel output jumped 7.5 percent to 420 million tons in the first nine
months of the year, according to the government. Demand in the Asian
nation, the largest consumer of steel, may expand by 19 percent this
year to 526 million tons, the World Steel Association predicted Oct.
12.

Profit Drops

The aggregate profit of China’s 70 biggest steelmakers fell 78 percent
to 30 billion yuan ($4.4 billion) in the first nine months from a year
ago, the statement also said. Mills recorded profits from May through
September, it said.

Steel-product inventories at China’s 26 major cities have risen by 5.3
million tons, or 91 percent, to 11.1 million tons as of the end of
September from the start of 2009, the association said.

Stockpiles of steel products and semi-finished products, including
billets and slabs, have risen 14 percent to 11.5 million tons in the
same period at China’s 68 major steelmakers, CISA said.

“Continuous rising inventories will force prices to drop further,
hurting profits at steelmakers,” CISA said. “The business situation
would be harder for the industry in the fourth quarter through early
next year.”

The government should implement more controls on steel imports, it said.

Iron Ore Prices

The outlook for steelmakers suggests they won’t be able to pay more for
iron ore, a key raw material, next year, Luo Bingsheng, vice chairman
of CISA, said by phone from Beijing.

Contract iron ore prices may jump 14 percent next year to the
second-highest on record, according to a Bloomberg survey of 11
analysts last month.

“Even if iron ore prices rise as institutions estimate, the room for
gains would be very limited because of an oversupply of the raw
material,” Luo said. “It’s also because steelmakers are struggling to
break even after steel prices fell.”

Luo declined to give a specific forecast. The association negotiates on
behalf of Chinese steelmakers in price talks with iron ore producers.

Iron ore imports by China jumped 36 percent to 469 million tons in the
first nine months from a year ago, according to customs data. The
imports, partly by traders, have exceeded actual demand by 66 million
tons, CISA previously said.

Source: Bloomberg

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