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China tells steelmakers to cut output again to stem price fall

Beijing takes lead in capacity reduction through corporate consolidation

SHANGHAI -- The Chinese government is pressuring steelmakers to cut output again this year, fearing that a supply glut will push down prices at a time when the economy is still recovering from the COVID-19 pandemic.

An official for China's Ministry of Industry and Information Technology told reporters late January that the country's crude steel output will be lower this year than the last. The official also stressed that steelmakers can build new blast furnaces as long as the overall capacity remains lower than before, a sign that the government is serious about slashing production across the board.

The pandemic caused Chinese steelmakers to cut production in the first half of 2020, but demand for the metal recovered rapidly in the second half, thanks to the government's stimulus measures. The recovery was so strong that China's crude steel output actually rose 5.2% on the year to a record 1.05 billion tons in 2020, the only major economy that had increased output.

Beijing has stepped in now as prices have started to soften. The price for hot-rolled coils, used to make steel sheets for cars and appliances, briefly topped 5,000 yuan ($770) per ton in December but has declined after that to below 4,500 yuan.

Although that is still high compared with the 3,200 yuan level recorded in early April as the country emerged from the pandemic, some industry insiders said that concerns were growing because the government's infrastructure investments were not enough to sustain growth in the sector.

At the press conference in January, the ministry official indicated that the government will play a leading role in consolidating steelmakers and their aging facilities.

Coinciding with the news conference, some Chinese media reported that the country's biggest steel producer China Baowu Steel Group and Shandong Iron and Steel Group had begun merger talks. Shandong Iron and Steel was the country's seventh-largest steelmaker in 2019, producing 27.58 million tons of crude steel, according to data from the World Steel Association.

Baowu made the ninth-ranked Magang (Group) Holding Co. its subsidiary in September 2019 and acquired a stake in the six-ranked Shougang Group in November that year.

Despite opposition to such integration from local governments and other stakeholders, Beijing has gone ahead to reorganize the sector and cut production capacity.

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