China's steel industry burdened by overcapacity, workers baulk at shutting plants

The mainland's chronically oversupplied steel sector will take years to restore balance in the demand-supply equation, and this will come about from bankruptcies of privately owned firms, amid weak demand and prices, tighter pollution controls and stringent credit conditions.

Sharp falls in the prices of raw materials such as iron ore and coking coal helped boost the steel sector's profits in the first half of the year, but analysts said that until local governments showed they were serious about curtailing overcapacity, the industry would only be marginally profitable at best.

"China is still many years away from addressing overcapacity … the government is closing excess capacity in order to tackle environmental problems, rather than trying to help the economics of the steel sector," Sanford Bernstein analyst Vanessa Lau said in a research report.

After visiting steel mills and local government officials in Tangshan, Lau said industry figures suggested only 500,000 tonnes of capacity in small plants had been mothballed, a drop in the bucket compared with the city's shutdown target of 40 million tonnes by 2017, accounting for 30 per cent of its capacity.

Medium-sized and large steel mills tracked by the China Iron and Steel Association posted a combined net profit of 7.48 billion yuan (HK$9.4 billion), up 133 per cent year on year. Still, the net profit margin was a meagre 0.41 per cent. Excluding non-core operations, they racked up a loss of 660 million yuan in steel-related operations.