Doubts are hovering in China over whether it is proper to permit two 10Mt/y iron and steel projects to go ahead when the country’s steel industry is still suffering overproduction and a meagre profit.

The doubts came after the National Development and Reform Commission (NDRC) approved two new steel projects, one for Baosteel and one for Wuhan Iron and Steel Group Corp. (Wusteel) in south China with investments totalling hundreds of billions of RMB.

However government officials and some experts argue that these southern coastal region-based projects may provide new opportunities for China’s iron and steel industry, as the two projects will upgrade the industry by forcing out old production capacity, and will also optimise both the geographical distribution and product mix of the steel sector. Both projects aim to produce value added steels for the automotive and domestic appliance manufacturing industries.

According to the data from the NDRC, Baosteel’s RMB69.68bn (US$10.9bn) project, to be built in Zhanjiang, Guangdong Province, will add an annual production capacity of 9. 2Mt of iron, 10Mt of steel and 9.38Mt of steel products.

Wusteel’s project requires an investment of RMB63.99bn ($10.06bn) and will be in Fangchenggang, Guangxi Zhuang autonomous region. Capacity will be 8.5Mt of iron, 9.2Mt of steel and 8.6Mt of steel products a year. But, despite its low-cost land allocation and labour, the project can hardly find adequate demand within the autonomous region as it is still one of the least developed in China and export markets primarily to SE Asia still have to be found, and are likely to prove less profitable than the domestic market.

Just as the two projects won governmental approval after four years of delay, in May, China’s steel industry was confronted with challenges rarely seen in a decade: severe overcapacity, poorly structured product mix, and meagre profits. The two projects must be launched only on the premise of downsizing the existing crude steel capacity, NDRC stressed. That means Guangdong Province needs to eliminate 16.14Mt of crude steel production capacity before the construction of the Zhanjiang project; and Guangxi will have to phase out 10.70Mt for the Fangchenggang project.

Current steel production capacity remains very high, and exceeded 900Mt in 2011, some 200Mt higher than domestic demand. Some observers even warns that it would be difficult to slow down the capacity increase without plans to de-stock the inventory and shut down steelworks.

The over concentration of steel production capacity in China’s northern region where there is an obvious lack of water posed too much pressure on logistics and adds to cost.

Source: China Metals