March 5, 2011 / 12:09 PM / in 7 years

China steel has last chance to restructure- Angang

* Angang president says overcapacity eating into efficiency

* Still no timetable on merger with Benxi

* Says China mills prefer longer-term iron ore agreements

By David Stanway

BEIJING, March 5 (Reuters) - The next five years will give China’s steel sector its “last chance” to resolve structural problems through a nationwide merger programme, the head of one of the country’s leading steel firms said on Saturday.

Zhang Xiaogang, president of the Anshan Iron and Steel Group (Angang), issued a stark warning to the domestic steel sector, saying that efficiency was shrinking as a result of chronic overcapacity problems.

“The Chinese steel sector is facing an extremely big challenge and steel enterprises mustn’t take the old road and chase their own investments, additional capacity, and their own market share at a time when there is already overproduction,” he told reporters on the sidelines of a meeting of parliament.

China’s steel industry, by far the world’s biggest, is estimated to have a total capacity of around 800 million tonnes. Crude steel production last year stood at 627 million tonnes.

The sector has been struggling with lower margins in recent months, with steel price increases failing to match the surge in the cost of key raw materials iron ore and coking coal.

Zhang said the performance of the company in the fourth quarter of 2010 was “not too good”.

“We didn’t make losses in the fourth quarter but profits were lower than in the first, second and third quarters,” he said.

In its new five-year plan for the sprawling sector, Beijing is pushing for a comprehensive consolidation drive, saying that fewer mills will help create higher industry standards and reduce pollution and energy waste, as well as giving China a bigger say in global iron ore pricing.

Anshan Iron and Steel, based in northeast China’s Liaoning province and the parent of Shenzhen-listed Angang (000898.SZ), has been involved in a protracted merger with local rival Benxi Iron and Steel.

OVERSEAS TARGETS TOO EXPENSIVE

Zhang told reporters at last year’s NPC session that the issues surrounding the merger were expected to be solved by the time parliament met again in 2011. This year, he said the remaining stumbling blocks were likely to be overcome very soon, but he wouldn’t provide further detail.

Anshan Steel is one of a number of large state-owned steel enterprises entrusted with the task of bringing 60 percent of the country’s total capacity under the control of its top ten producers by the end of 2015.

Last May, it was also given the go-ahead to take over Panzhihua Steel based in southwestern China’s Sichuan province, and other acquisitions are also on the cards.

The China Iron and Steel Association wants 50 percent of total imports to be sourced from China invested projects by the end of 2015, up from about 15 percent at present.

Zhang said Angang and other steel firms were currently looking for investment opportunities abroad but costs were currently too high.

“Everybody wants to have (overseas resources) but you can’t just look to the next two years; you have to look at the end of five years and see if the results are good or not, whether the costs are good and whether there is competitiveness,” he said.

Zhang added Chinese steel mills were unlikely to accept the more flexible monthly or even daily price adjustments now being offered by leading global miners, saying China still seeks longer-term agreements with the likes of Rio Tinto (RIO.AX) (RIO.L), BHP Billiton (BHP.AX)(BLT.L) and Vale (VALE5.SA). (Editing by Jason Subler and Keiron Henderson)

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