Chinese steel producers have been forced to reduce output volume for a second time since the export market slump, following a new fall in prices. The previous reduction occurred in the latter half of 2008.

In a recent steel executives' meeting, Shan Shanghua, secretary-general of the China Iron and Steel Association (CISA), observed that increased production had failed to increase profits; on the contrary sluggish sales, low prices and weak market demand are all directly undermining the steel industry's recovery. Steel manufacturers must therefore reduce production to prevent a further price dive.

Business data revealed by CISA shows that in 20 major cities, the inventory of major steel products – hot roll, cold roll, plate, wire rebar – amounted to 6.7 million tons, an increase of 1.84 million tons, or 38 percent against the previous month.

"We don't have a reduction plan yet, but will carry out maintenance work," a management representative from Laiwu Iron and Steel Company, east China's Shandong Province, told Caijing magazine on March 18, while a marketing officer in Jiuquan Iron and Steel of northwest China's Gansu Province said the company started to slash output this month.

Meanwhile, CBI China, a business information agency, launched a survey of 23 key domestic steel companies and found out that planned output for March is down 7.90 percent against February. CBI China's Vice President Li Yi thinks that high productivity and low demand will force a further reduction on some steel producers.

Steel prices in China plunged in Q4 last year and the composite steel price index bottomed at 101.49 in mid-November 2008. But reduced output later brought about a slight price recovery, and the index climbed up to 109.26 in February 2009, up 7.76 percent from January.

Reduced production helped bring up the price, which in turn stimulated production. CISA's report shows the country's January daily steel output hit 1.339 million tons, a drastic climb of 9.88 percent over the previous month, and in February, the figures rose further to 1.445 million tons and 7.91 percent respectively.

But the negative effect of recovering output began to make itself felt in middle and late February. On March 5, the index tumbled back to 101.14, 7.43 percent lower than the peak figure in mid February. Analyst Hu Yanping with Umental.net attributes this to the pressure of recovering output, and believes the new price fall is inevitable. "The price of rebar II in the Shanghai area has dropped even further than last year's low."

On the other hand, these unusual and irrational production fluctuations have pulled up the price of iron ore, resulting in yet higher costs and further squeezing steel margins. "India's iron ore was priced at less than US$70 per ton last November, but rose to US$85 this February.

Shan also reveals that the entire Chinese steel business is suffering a loss of up to 1 billion yuan (US$146 million). The loss for iron plate manufacturers is even worse, estimated at 300-400 million yuan (US$ 43-58 million).

(China.org.cn by Maverick Chen, March 19, 2009)