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Reasons for steel overcapacity in China

2010-03-03 19:30 BJT

Special Report: 2010 NPC & CPPCC Sessions |

The price of steel in China has been rising in recent years and the 4 trillion yuan stimulus plan launched at the end of 2008 also boosted the demand for steel. But the economic planner says overcapacity is a big problem in the sector.

According to the China Iron and Steel Association, production by key steel makers rose 11 percent in 2009 from the year before. And crude steel output hit nearly 570 million tons, surpassing the target by 100 million tons. But only half the producers had official approval to manufacture steel.

Xiong Bilin, Dept. Head of National Development & Reform Commission, said, "The increase was due to growing demand. And investment in steel was meant to guarantee economic growth. However, the production of low-grade steel such as rib steel increased in a very short period of time. And the entry threshold for the production of this type of steel is low and making it uses high levels of energy. This made structural adjustment in the steel sector difficult and pushed up the cost of macro-control."

In fact, regulators have been concerned with curbing overcapacity in the sector since 2004. But that has put no damper on production volumes which are still rising.

Analysts say one obvious reason why it's hard to tell producers to cut back is because prices of steel have been on the rise. And, more importantly, local governments are often unwilling to cooperate. Currently steel manufacturers partly belong to the central government while a large volume of smaller factories are owned by local governments. For these local authorities, steel makers provide revenue from tax.

Analysts say value added tax makes up most of the revenue for local governments. And investment by local authorities in fixed assets is still one of the driving forces behind China's economy.

Editor: Liu Anqi | Source: CCTV.com