IRON GIANT: A worker at the Tangshan plant of Hebei Iron and Steel Group, China's largest iron and steel maker in terms of output (XINHUA)

China's steel blast furnaces are hot, too hot, operating at an overcapacity that will be exacerbated amid the economic slowdown.

The National Development and Reform Commission (NDRC) recently approved a mega steel project in Zhanjiang, Guangdong Province, and a plan by Wuhan Iron & Steel Group (Wusteel) to build a steel mill in Fangchenggang, Guangxi Zhuang Autonomous Region.

While local governments may be happy with the NDRC's approval, the decision could worsen overcapacity in the already overcrowded industry.

Statistics show that China's large and medium-sized steel enterprises suffered a deficit of 33.75 percent in the first four months of this year, with the total losses reaching more than 10.4 billion yuan ($1.64 billion), 32 times their losses during the same period of 2011.

Despite the fact that the country has repeatedly issued orders and regulations aimed at curbing blind expansion of domestic steel production, the market frenzy was still out of control. The sector pinned its hopes on industrial upgrading and consolidation to pull itself out of this predicament.

Slumping demand

With the domestic economy slowing and demand stagnant, Chinese steelmakers have kept their eyes on overseas markets. China's steel exports jumped 28 percent in the first four months of this year.

But booming exports did not bring the profits that steelmakers need.

The steel industry realized 18.33 billion yuan ($2.91 billion) in profit in the first quarter of this year, 67.8 percent less than in the same period of last year, according to NDRC data.

"The export surge in the steel sector was the result of price cut," said Xie Zhaowei, an analyst with Huatai Great Wall Futures based in Guangzhou, Guangdong Province.

Steel prices in China have gone soft since last year. Last September, the China Iron Ore Price Index stood at around 600. Six months later it plunged to 480. During the same period, the Composite Steel Price Index decreased by more than 10 percent from 135 to 120.

"Domestic steel sector was plagued by its high reliance on overseas raw material. The world's three top iron ore miners controlled the price, squeezing the whole sector's profit margin," said Chi Jingdong, Deputy Secretary General of China Iron and Steel Association (CISA).

Last year, the average CIF price of imported iron ore was $163.8 per ton, an increase of 28.1 percent from 2010, costing domestic steelmakers approximately $25 billion more in securing foreign ore.

Dropping prices come along with the country's sluggish economy. As a barometer of the macroeconomy, China's appetite for steel waned as the country's GDP growth slowed down.

In the past decade, China's demand for steel grew 15 percent annually, building the country into a powerhouse that now contributes more than 40 percent of global steel production. But last year steel demand was reduced by 8 percent and this year it could see a dramatic slowdown to 4 percent, according to CISA.

"It is not likely that the country will have big economic stimulus measures this year like that in 2008, so steel supply will outpace demand this whole year," said Su Jiangang, President of Maanshan Iron and Steel Co. Ltd.

The growth in steel demand will be zero in the next few years, said Wu Wenzhang, General Manager of Steelhome.cn, a steel industry website based in Shanghai.

Blind expansion

When completed in 2015, the steel plant in Zhanjiang is expected to have an annual output of 10 million tons, more than 1 percent of the country's total crude steel output last year. Wusteel's Fangchenggang project is to have an annual capacity of 9.2 million tons.