But the output targets were set at a time when the sector is reporting grim performance and unprecedented overcapacity. CISA estimated that the industry could still produce in excess of 900 million tons this year, significantly above last year's demand (domestic consumption plus exports) of a little less than 700 million tons.

The excess capacity remained an outstanding problem in the domestic steel industry last year, according to a report released by the People's Bank of China.

The NDRC has repeatedly issued orders and regulations aimed at curbing the blind expansion of domestic steel production. In March 2009, a harsher-than-ever ban was even promulgated on the launching of any new steel projects within three years. In April 2010, the Chinese Government announced that small steelmakers, with steel blast furnaces smaller than 400 cubic meters, must shut down due to overcapacity concerns. But the glut of steel production continues to aggravate the Chinese economy.

The result released by the National Audit Office on June 1 showed that state-owned steel bigwigs, including Shanghai Baosteel Group (Baosteel), Anshan Iron and Steel Group (Angang) and Wusteel were found in violation of the ban on capacity limits.

"Despite the fact that the Chinese Government put steel in the shutdown list as early as 2005, its target has never been met in all these years. Steelmakers are still expanding their capacity," said Huang Huiwen, an analyst with Shanghai CIFCO Futures.

"Only a small part of the new capacity was found and disclosed. Bigger parts in small and private steel mills were not able to be found," said Huang.

China's steelmakers are gambling that the Chinese economy will pick up again, said Pan Liang, a financial commentator.

In addition to overcapacity, the industry is still plagued by several structural problems such as low-end product mix, fragmented industry layout and large-scale outmoded facilities. Each year China needs to import more than 1 million tons of high-end stainless steel products from abroad, as there are only about 10 enterprises, out of more than 10,000 stainless steel manufacturers, that make high-end stainless steel products, said Jiang Zhenghua, Chairman of Jiangsu Sandeli Group, a domestic stainless steel pipe producer.

China should speed up eliminating out-of-date capacity and developing high value-added stainless steel products, instead of increasing capacity, as some local governments are doing, said Li Cheng, an advisor with the Stainless Steel Council of China Special Steel Enterprises Association.

Sector consolidation

The steel sector is in a crucial period of transition highlighting low growth rate and low profit margin. According to the latest five-year plan for the steel industry, the sector will strictly control capacity expansion and speed up the elimination of outmoded capacity, continue to boost mergers and acquisitions for the creation of a more centralized industry and enhance product quality driven by innovation and technical updating.

China's steel industry is expected to accelerate consolidation amid the grim market and sluggish demand, said Xu Xiangchun, chief analyst for Mysteel.com, a steel industry website based in Shanghai.

According to industry analysts, the approvals in the new steel plant follow a consistent policy in moving China's industrial base away from heavily populated areas. The Central Government wanted to see more steel production transferred to the coast because of easier access to water, as well as more efficient logistics. The steel project of Wusteel in the coastal city of Fangchenggang is expected to help reduce the steelmaker's transportation costs.

While giving the go-ahead to new steel mega projects in coastal areas, the government insisted that the approvals were part of the ongoing consolidation effort across the industry and that the new plant would replace the older, wasteful stock.

The NDRC said the Zhanjiang project is based on a sizeable cut in local steel production. It is expected that 16.14 million tons of crude steel production will be slashed in Guangdong Province.

Local authorities in Guangxi have agreed to cut capacity elsewhere as part of the deal involving the Fangchenggang project.

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