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China, the world's biggest steel maker, will aggressively cut backward steel production capacity within the next five years to ease the current market glut and slowing demand for iron ore.

Ninety million tons of steel production capacity will be axed during the period according to a plan made by regulators, Zhou Xizeng, a steel analyst with Beijing-based CITIC Securities Co Ltd, said yesterday.

In the first step of the plan, regulators will soon reveal the specific number of blast cupola furnaces producing pig iron to be discarded this year, according to sources from China Iron and Steel Association based in Beijing.

The move is expected to slash the production capacity of iron ore by 60 million tons and pig iron, raw cast iron, by 40 million tons - which could be used to make the same amount of crude steel.

Sources said regulators would also enhance the steel sector's threshold in terms of technology, capital investment and environment protection.

"Backward production capacity must be removed as it has triggered a serious low value-added product oversupply in the domestic market, and hurt steel prices and the sector's profits significantly," Zhou told China Daily.

"Meanwhile, however, production capacity of high value-added steel products which are in short supply will continue to grow rapidly to meet mounting demand, such as steel plates and sheets used in automobiles and home appliances," he said.

Total steel production capacity in China exceeds 400 million tons now. The nation's crude steel output grew by 24.56 percent to 349 million tons last year from 2004.

Tian Shuhua, from China Galaxy Securities Co Ltd based in Beijing, yesterday said China's plan to cut steel production capacity signalled its iron ore demand would slow down considerably and international iron ore prices would decline.

Negotiations between China and global leading iron ore producers - Austria's BHP Billiton and Rio Tinto, and Companhia Vale do Rio Doce from Brazil - have come to a stalemate, as the former insists on a price decline and the latter still wants to raise prices.

"These mining groups have been enjoying staggering profits in recent years. International iron ore prices are too high and should be cut to the level in 2004," Tian said.

Current iron ore prices stand at US$40 per ton, up from around US$23 in 2004 and US$20 in 2003.

"If prices continue to increase, Chinese steel companies will fall into losses and have to slash iron ore procurement on one hand. On the other, miners in the world's other regions, such as India and Ukraine, will stimulate iron ore production greatly which is likely to generate a global oversupply again," Tian said.

"Iron ore producers from Australia and Brazil should think it over."

The nation's iron ore imports grew by 67.18 million tons year-on-year to 275 million tons in 2005, accounting for 43 percent of global iron ore trade volume, according to statistics.

The steel association predicted China's iron ore imports would increase by only 25 million tons this year due to slowing demand and expanding domestic production of iron ore.

It said iron ore production in China would reach 528 million tons this year, up 48 million tons from 2005.

Profits of China's steel sector have shrunk again as a result of soaring iron ore costs and sagging steel prices.

The nation's top 66 steel companies earned a combined profit of 76.87 billion yuan (US$9.49 billion) last year, down 10.62 percent from 2004, according to statistics. Last December, 14 firms reported losses.

CITIC's Zhou predicted earlier that the steel sector's profits would tumble by more than 50 percent this year from 2005.

The comprehensive steel price index stood at 94.18 points at the end of last year, down from 138.33 points at the end of last March.

(China Daily February 28, 2006)