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Banks told to tighten lending to outdated steel producers

PUBLISHED : Thursday, 14 May, 2009, 12:00am
UPDATED : Thursday, 14 May, 2009, 12:00am


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Beijing has asked banks to cut loans to steel mills operating with outdated facilities and those adding production without real demand, as part of its efforts to rein in overcapacity.

In a recent notice sent to local governments, steel industry and trading bodies and large steel mills, the Ministry of Industry and Information Technology also urged big players to limit output, especially of products with a serious supply glut.

The local authorities should speed up closures of outdated facilities and ask commercial banks to curb lending to mills that contributed to excessive capacity, it said.

'Such measures could help ... as working capital is key to the survival of steel mills, especially those small and medium ones,' said Hu Hao, an analyst at China Everbright Securities.

Mainland steel mills, battered by weak demand and falling steel prices, can churn out about 660 million tonnes a year, but the ministry estimated total demand for domestic consumption and exports at about 462 million tonnes this year.

Production of the mainland's steel industry, the world's biggest, had been growing too fast without real demand, especially in flat products, the ministry said.

In the first quarter, mainland mills produced 127 million tonnes of crude steel, up 14 per cent from a year earlier, accounting for 48 per cent of the world's total.

At the same time, however, 65 other steel-making countries produced a total of 136 million tonnes, down 37 per cent, it said.

'The notice reflects that the ministry thinks the steel industry is still in its down cycle and demand will not have a significant pick-up in the short term,' said Helen Wang, an analyst at DBS Vickers.

Domestic steel prices have fallen since February after a brief rebound.

The benchmark domestic steel price declined 9 per cent in the first quarter and could drop further this quarter because of overcapacity and surging imports, the China Iron and Steel Association said last month.

Mainland steel prices were also affected by capacity utilisation levels, the slowdown in overseas demand and the continued decline in domestic costs, a report from Macquarie analysts said.

'Low capacity utilisation levels might mean prices in the region do not stabilise until well into the second half this year,' it said.

According to the Macquarie report, the mainland's steel capacity utilisation rate is expected to decline to 74 per cent this year from 83 per cent last year. The rate was 90 per cent in 2007.