Why low-grade steel capacity to remain in China?

In the latest state's notification document (No.1084) issued by National Development and Reform Commission (NDRC) and other 7 state departments, the deadline for closing all blast furnaces with 300 cubic meters or less capacity will be postponed until 2010. This means, approximately 100 million tons low-grade capacity, which was originally planned to be cut before the end of 2007, will still remain. Central government of China has tried to promote steel industry's healthy development by radical wash-out policies, but the result has been unsatisfactory so far. The government is now changing plans due to the following reasons: 1. Huge demand China's GDP growth rate in the first half of 2006 was 10.8 percent, much higher than the planned 8 percent. Economy's rapid development creates a huge demand for steel products. Particularly, in the first half of the year, fixed asset investments grew 31 percent year on year, which was mainly caused by local governments and a little beyond the control. Fixed asset investments have increased the demand especially for construction steel products such as rebar, and the blast furnaces with 300 cubic meters or less capacity are producing this kind of long products. Currently, total annual output of such blast furnaces is about 99.88 million tons, accounting for 1/4 of the national output. Due to huge market demand, their existence is certainly rational. What state should do now is to improve the management system and slow down the too-fast investment growth caused by local governments in order to cool down the demand. 2. Counterforce form local governments and enterprises involved Local governments certainly do not want to practice state's polices. These policies will affect their achievements in post and tax income very badly. Besides, they will have to work hard to find out how they can close the mills. The mills that are planned to be cut are mainly located in Hebei and Shanxi provinces. They occupy 46.9 and 50.7 percent of the provinces' total capacity respectively. There are many mills and closing them is far more difficult than just printing words in policy documents. Steel investors are also in favor of blast furnaces with 300 cubic meters. Because, in general, it takes just one year or less to recover the investment, and the total investment amount is not large; just around RMB 100-200 million ($12.5-25 million). To invest in building the new blast furnaces with at least 1,000 cubic meters as required by the state will cost much higher and the construction period will be longer. Governments' weak effect On one hand, detail measures of downsizing low-grade capacity have not been put forward so far, and there are only wishes to cut capacity without any concrete methods. On the other hand, the government had already taken many similar actions aiming at local enterprises with many wash-out criteria, but most of the results were not good. Mills disregarded all of them. Some mills even think that their businesses only concern themselves, not the government. It is rational to forecast that this postponement of the deadline is just a beginning. Due to great difficulties, Chinese government will perhaps further change its policies on downsizing low-grade steel capacity.