China's humongous steel industry faces a series of dilemma -- rising costs and dropping prices, over capacity and lower demand -- while it struggles to meet new opportunities during a period of contraction.

The Economic Information Daily reports that China produced 349.36 million tons of crude steel in 2005, accounting for 30 percent of the world output. China produces more steel than the next three largest steel producing countries combined.

Yet analysts predict that the total demand for steel this year would be 13 million tons less than last year's output as they see a need for 336 million tons to be produced.

Meanwhile the price of steel in China continues to plummet from its benchmark price in March of last year. At that time the steel price index stood at 138.33, but by August it had dropped to 116.59, a decrease of 15.72 percent.

The industry is also trying to absorb another blast from rocketing production costs which have soared some 65 percent in the last two years. This is blamed on rising world prices for iron ore and oil along with increased costs in China for coal, electricity and transportation.

Despite the challenges, the steel industry as a whole make a profit in 2005. Sixty-six of the country's largest steel producers realized profits of 76.87 billion yuan (9.49 billion U.S. dollars).

Despite overproduction in the indigenous industry, the country still had to import over 26 million tons of rolled steel and billets in 2005.

A number of major construction projects in China found it necessary to import specialized steel products that are not made here. This includes a well-known hotel in Hangzhou, capital of eastern Zhejiang province, that bought more than 70,000 cubic meters of 3-mm steel plates from Spain at a cost of about 100 million yuan.

Seeing an opportunity to capture more of the specialized market has lead China's steel makers to rush to fill the void that is now predicted to fill too fast.

For example, experts warn that China's output of stainless steel could jump to 16.3 million tons by 2010 if all the producers complete their planned upgrades. Yet the demand for stainless steel is only expected to reach 8 to 10 million tons by then, according to analysts.

Last month, Luo Bingsheng, executive vice-chairman of CISA, said the country plans to shut down smaller blast furnaces. Those with a capacity of less than 200 cubic meters will be decommissioned by the end of this year and those that produce less than 300 cubic meters will be put out of operation by the end of next year.

It's also expected that the government will continue to encourage mergers and acquisitions of steel producers which could also provide a breakthrough in sector restructuring.

Source: Xinhua