China is drafting plans to spur mergers and acquisitions among steel mills as part of efforts to consolidate state-owned enterprises in 10 of its key industries to boost efficiency and shore up profit margins, the industry minister said yesterday.

Li Yizhong, minister of industry and information technology, told a media briefing that the ministry was drafting guidelines to govern consolidation in the steel industry but gave no specific timetable.

"Steel makers in China should eliminate outdated capacity and refrain from expansion for the next three years to curb overcapacity," Li said. "Mergers and acquisitions are also an effective means to avert excess capacity."

Li said the steel industry's total output this year was estimated at 660 million tons, surpassing the demand of 470 million tons. In addition, projects with total capacity of about 58 million tons are still under construction.

"The overcapacity would cause vicious price competition within the steel industry, hurting profit margins of the mills," said Hu Yanping, an analyst at Umetal Research Institute. "The key problem lies in the elimination of outdated capacity."

Hu pointed out that the overcapacity may disadvantage China in iron ore price negotiations.

Li said that as the world's largest iron ore buyer, "China should have more say in the global iron ore trade."

Li said the government would support the China Iron and Steel Association, which heads the 2009 iron ore price negotiations with major iron ore suppliers on behalf of domestic steel makers.

The ministry will in the second half issue another guideline on energy conservation and emissions reductions in key sectors, including the chemical and steel sectors.

Li stressed that economic development is at a crucial time. The priority for the second half of this year is to rejuvenate the country's 10 key sectors, including auto, logistics and telecommunications, to restructure the economy and seek new momentum for economic growth.

(Shanghai Daily August 14, 2009)