China's steel makers set for two more years of poor profits

Profitability of mainland steel producers will

remain poor in the next two years in the severely oversupplied sector, unless Beijing comes up with a radical policy to consolidate the number of producers, according to credit rating agency Standard & Poor's.

Poor discipline in shutting excess production capacity was to blame for major losses in the mainland steel sector, said S&P's head of Asia Pacific commodities credit ratings, Suzanne Smith.

"Globally steel companies are all hurting, but the Chinese industry could be the worst off," she told reporters in a teleconference yesterday. "In Europe, a number of blast furnaces have been closed down, but we have not seen much of that in China."

She estimated that 10 to 25 per cent of the mainland's steel production capacity was not in use, and said the sector had seen overcapacity since 2005.

"Small and medium-sized producers, long [Beijing's] targets for closure, may continue to operate because they support local governments with tax revenue and employment," Smith said in a research report.

While Beijing has issued several rounds of industry policies with targets for the industry to consolidate and phase out inefficient and pollution-prone plants, implementation has been lacking at the local level, and "new radical measures" on consolidation is needed, the report said.