Since last year, China's steel sector has registered a gradual slowdown in the production growth rates of crude steel, pig iron and finished steel. In the last two months of 2007, the year on year growth of crude steel output dropped down to 4.3 percent in November and 4.6 percent in December. During the January-February period of 2008, the outputs of the abovementioned three categories continued to increase at a relatively low speed. During the period in question, China's crude steel output increased by 5.8 percent and seven percent year on year in January and February respectively, averaging 6.4 percent. Meanwhile, pig iron production increased by 4.7 percent in January and by 10.1 percent in February, averaging 7.3 percent for the January-February period. Meanwhile, the corresponding figures for finished steel were 12.4 percent and 12.2 percent, with an average of 12.3 percent.
The slowdown in the growth rate of China's crude steel output is mainly because the intensive investments made in China's steel industry during the 2002-2005 period had already been absorbed by 2006. According to the data from China's National Bureau of Statistics, fixed capital investment in the country's steel industry increased by 45.9 percent to RMB 70.428 billion in 2002, by 87.2 percent to RMB 132.907 billion in 2003, by 44 percent to RMB 191.392 billion in 2004 and by 33.9 percent to RMB 256.349 billion in 2005. In 2006 fixed capital investment rose only 1.5 percent to RMB 260.299 billion. In 2007 the figure was RMB 299.03 billion, up 14.9 percent.
The decrease in fixed capital investment growth naturally entails a slowdown in the growth rate of new added capacities. Considering that usually it takes three years for an integrated mill to complete the process from construction to production, then it may be said that projects initiated during the 2002-2005 period reached completion by 2007. Also from the data for crude steel production growth in November 2007, we can see that growth of crude steel output had already decreased to below 10 percent.
Another significant factor is that since April 2007 China has expended great efforts towards the elimination of out-of-date capacities. According to the plans revealed in April 2007, China is aiming to eliminate 100 million mt of iron-making capacity and 55 million mt of steel-making capacity by 2010. So far, China's National Development and Reform Commission (NDRC) has already signed agreements for the elimination of out-of-date capacities with a total of 28 provinces (cities or districts), nearly covering all the major iron and steel producing areas in China.
At the same time, the NDRC is intent on combining the elimination of out-of-date capacities with the approval of new steel projects. As regards provinces or cities planning to make investments in new projects, the NDRC will ask them to close down out-of-date capacities before granting its approval for the new projects. Thus, the amount of newly-built capacities in China can be kept slightly higher than the amount of eliminated capacities with almost no change in total overall capacity, roughly at the level of 500 million mt.
The slowdown in the growth of steel output in February 2008 is mainly attributable to the negative effects on southern mills of the snow disaster that hit China during the month in question. Moreover, during the pre- and post-Olympic Games period, many mills in Beijing and Tianjin will stop production, also contributing to the low-speed growth of steel production.
The decrease in fixed capital investment, along with the speeding up of the elimination of out-of-date capacities, will have a braking effect on the increase rate of China's overall steel capacity for some time into the future. It may be expected that China's steel production growth will be maintained at a moderate rate, with a five to 10 percent increase rate to be expected for a relatively long time to come.