Under-reporting in the Chinese steel industry means that market analysts could have under-estimated China’s iron ore demand by as much as 118Mt over the next two years

This is according to steel industry consultants MEPS International in their new publication China Steel Insight.

It appears that Chinese mills did not fully declare their steel production due to pressure to meet government targets to close obselete capacity by the end of 2010.

MEPS estimates crude steel output in the country was under-reported by as much as 47Mt and production of pig iron by 44Mt. Consequently production of crude steel in 2010 could have been as high as 674Mt compared to a figure of 627Mt published by China’s National Bureau of Statistics.

Some indication of the true scale of steel production is given in the latest production data for 2011, released after the government’s 2010 campaign against out-dated steelmaking capacity ended.

This shows steel output early this year running at an annualised production rate of 706Mt .

This compares with estimates by MEPS that crude steel production in 2010 peaked at an annual rate of 739Mt. The highest annual run rate as stated by China’s National Bureau of Statistics for 2010, was 674Mt.

This implies that crude steel production at the beginning of this year, traditionally a period of low output in the Chinese steel industry, was 5% higher than peak rates in 2010. Analysts agree that this is unlikely.

The Chinese steel industry producing at even higher levels than previously thought has global ramifications for commodity prices. The cost of coking coal and iron ore are likely to remain high if miners have downplayed the scale of future Chinese demand.

Peter Fish, Managing Director of MEPS International says, “Chinese under-reporting of steel output could explain the high cost of iron ore in 2010. This could also have a major impact on the mining companies’ predictions for demand in 2011 and 2012.”