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(2) Iron and Steel Industry
As a pillar industry in the national economy, the iron and steel industry is related to many other sectors and plays a large role in economic and social development, resource conservation, and environmental protection. Due to the spillover of the international financial crisis that started in the second half of 2008, the domestic iron and steel industry had to deal with the difficult situation of a sharp decline in demand and prices, thus incurring losses. In response, the State Council released the Program of Restructuring and Rejuvenating the Iron and Steel Industry. Since its implementation, the Program has gradually produced its intended policy effect. In the first half of 2010, with demand stable at home, the output of the iron and steel and iron sector surged and exports continued to grow, contributing to the recovery and growth of the national economy. However, deep-rooted problems remain unresolved in the sector, including serious duplication of similar projects, excess capacity, disorder in the distribution of iron ore, and improper behavior of enterprises in resource conservation and environmental protection.
Fixed-asset investments surged without contributing to the easing of the excess capacity and structural problems. In the first half of 2010, fixed-asset investments in the sector (including mining) totaled 195.3 billion yuan, up 10.4 percent year on year. Iron and steel enterprises faced upward inventory pressures and stronger market risks. According to a survey of the Iron and Steel Association on the inventory of the five major steel products in 22 large and medium cities, the steel inventory was up 34.2 percent from the beginning of 2010 to 10.80 million tons at end-June. The excess capacity in the iron and steel sector is structural, as reflected in the excess obsolete capacity and the output of low- and medium-grade products. In the first half of 2010, output of crude steel, pig iron, and rolled steel was 323 million tons, 304 million tons, and 399 million tons respectively, up 21.1 percent, 17.0 percent, and 26.1 percent year on year, continuing the upward momentum. According to a calculation based on calendar days, the average daily output of crude steel was up 21.2 percent year on year to 1.785 million tons, translating into annual output of 652 million tons. Given a nominal consumption (or available supply) of crude steel of 565 million tons in 2009, the total output of crude steel apparently is excessive as is the domestic supply.
However, high value-added steel products with high technology content are in short supply and must be imported from overseas. The profitability of enterprises is limited by rising production costs and declining prices. According to the Iron and Steel Association survey, the 77 large and mediumsized iron and steel enterprises made a profit of 50.72 billion yuan in the first half of 2010. With a return on sales of 3.47 percent, the sector’s profitability was relatively low compared with the industrial enterprise average. In the first half of 2010, the rising price of imported iron ore heightened the cost pressures on iron and steel enterprises. In June, the average price of iron core recorded by the customs office had risen 61.5 percent from the beginning of 2009 to US$139.85 per ton. But due to the austerity measures targeting the real estate sector, domestic steel prices started to fall in the beginning of May. Both higher production costs and declining prices of steel products squeezed the profit margins of the iron and steel sector. Pressures on resource supplies and environmental protection are growing. Statistics released by the Ministry of Industry and Information Technology show that in 2009 almost 70 percent of domestic iron ore demand in China was satisfied by imported iron ore. With a small number of countries such as Brazil and Australia holding power of iron ore pricing, resource manipulation is becoming greater and Chinese iron and steel companies have only a limited voice in the pricing of iron ore. Though the key large- and medium-sixed enterprises have reached the objective of reducing comprehensive energy consumption per ton of steel to less than 620 kilograms of standard coal, ahead of the projection the Steel and Iron Industry Development Policy, which outlines an objective of 730 kilograms of standard coal to be reached of 2010. However, due to the limited concentration in the domestic iron and steel industry, the top ten enterprises represent just 44 percent of total iron and steel capacity, and a large number of enterprises operate with obsolete capacity. As a result, the steel and iron industry is a heavy polluter and massive energy consumer and must complete the difficult task of phasing out outdated capacity to reduce energy consumption and emissions. As approved by the State Council, export tax rebates for
certain steel products were eliminated as of July 15, 2010 to contain the excessive expansion of steel exports and to promote the industry’s restructuring.
To address the deep-rooted problems in the iron and steel industry’s rapid development in line with the scientific development approach, to further implement the Iron and Steel Industry Restructuring and Rejuvenation Program, and to help realize the energy conservation and emission-reduction objectives outlined in the 11th Five-Year Program and to restructure the iron and steel industry, on June 4, 2010 the State Council released Several Opinions on Further Promoting Energy Conservation and Emission Reductions and Speeding up Restructuring of the Iron and Steel Sector, to take advantage of market changes and to employ economic, technical, legal, and necessary administrative measures to press for rapid progress in industry restructuring, energy conservation, and emission reductions and to promote comprehensive, balanced, and sustainable development of the industry. The Opinions also point out the need to contain excessive capacity expansion, strengthen standards in the examination of loan applications and approval procedures, enhance efforts to phase out obsolete capacity, conserve energy and reduce emissions, promote and speed up mergers and reorganization of iron and steel enterprises, encourage technology innovation and upgrading, regulate the distribution of iron ore in the domestic market, and promote development of domestic iron ore mining and facilitate implementation of the “going global” strategy of enterprises.
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