TURNING AROUND: The Chinese steel industry has been on the path to revival thanks to a series of government stimulus measures (REN YONG)

Reeling from the ailing economy's heavy blow to the market, Shougang Group, China's second largest steelmaker in terms of sales revenue, has been able to raise steel prices three times since early 2009. On August 8, the steelmaker announced its intentions to initiate a fourth price hike by an average of 500 yuan ($73.2) per ton as the industry continues to grow.

As the deep gloom of the domestic economic slowdown appears to be fading fast, nationwide steel prices have staged a prolonged rally in past months and will continue to rise, data from China Iron and Steel Association (CISA) revealed.

Restoring health

The CISA owed the market run-up to a series of government stimulus measures that effectively spurred domestic demands. By steadying production and proceeding with mergers and acquisitions, Chinese steelmakers also found shelter from the market contagion. Most of them have even crossed the line from negative back into positive growth in profits, the association added.

In the first half of this year, China's steel consumption was 267.93 million tons, representing a staggering increase of 10 percent year on year and reversing the downward streak in late 2008, said the CISA. The spark in demand has set the stage for a market turnaround, it added.

But the steel industry is not without concerns. The macroeconomic recovery has yet to have an unshakable foundation, leaving uncertainties concerning the business mood. Worse still, exports of steel and electromechanical products still have a long way to go toward bottoming out at a time of unprecedented recessions in the developed world.

Meanwhile, a set of intractable problems linger for the industry—excess capacity, low energy efficiency, serious fragmentation and weak innovation that have been constraining the healthy growth in the steel sector.

The challenge of addressing over-capacity was especially daunting. At the end of 2008, the sector's production capacity of crude steel hit 660 million tons, far in excess of the domestic consumption that was around 453 million tons, according to CISA.

Moreover, the gnawing concern has not shown any signs of abating just yet. The steel output, on the rise month on month in the first half of 2009, further worsened the demand-supply imbalance. This eventually hurt the steelmakers themselves as the depressed prices eroded their profit margins.

A report by the CISA said the Chinese Government has repeatedly stressed the importance of restructuring the steel industry for its healthy growth. It is urgent for the steelmakers to discard backward capacities, improve energy efficiency, press ahead with technological progress and control the total output.

Hope in sight

As the market continues to recover, mergers and acquisitions in the steel sector are gaining momentum. On August 8, Shougang Group inked an agreement with the Changzhi Iron and Steel (Group) Co. Ltd. to take over the Shanxi Province-based steelmaker, marking the sixth restructuring case in the industry this year.

Also, many steelmakers are taking advantage of the downturn to pump investments into technological improvements and advanced equipment as an effort to strengthen their energy efficiency. Some of them are even moving on to high-end steel products to sharpen their competitive edge.

The restructuring has become a top priority in the industry, and is picking up pace, the CISA report stated.

While reorganization is still underway, its positive impact has already been felt. According to the CISA, the total power consumption of the country's large and medium-sized steel enterprises was 113.88 million tons of standard coal, down 5.25 percent year on year. Their efficiency of water use also significantly improved, and discharges of sulfur dioxide and waste gases dropped appreciably.

However, the progress is far from enough for a heavily challenged industry. The effort to abandon backward capacities, in particular, has lagged behind plans.

The National Development and Reform Commission ordered that all furnaces with a capacity of less than 300 cubic meters and converters and electric furnaces with a capacity of less than 20 tons must be shut down. Accordingly, about 10 million tons of iron-making capacity and 6 million tons of steel-making capacity should be eliminated this year.