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Contrasting fortunes for steel, cement sectors

By Li Fangfang (China Daily)
Updated: 2008-11-14 10:31

The 4-trillion-yuan ($586 billion) economic stimulus plan and the abolition of some steel tariffs may not be enough to spur China's steel and construction materials industry, analysts said.

The Chinese government announced the stimulus package on Sunday to boost domestic demand, while the State Council yesterday announced it would cut tariffs and raise tax rebates on 3,770 export items, including some steel products.

Such measures, analysts feel, could provide immediate cheer to steelmakers, but in the long term they still have to grapple with an industry-wide downturn.

"The abolition of some steel tariffs from Dec 1 will definitely boost exports in the short term, but it's not enough to retract the downturn in international demand," said Zhao Zhicheng, an analyst with Essence Securities.

"We believe international steel prices will rapidly answer China's tariff cuts, and counter the export incentives of the central government. The policy will also inspire more steel trade disputes between China and other regions," said Zhao.

In October, exports of steel-products by China, the world's biggest producer, fell 31 percent, or 2.05 million tons, from a month earlier.

"The stimulus package will help increase domestic steel demand in the next two years," said Sun Yong, an analyst with China Galaxy Securities.

The financial turmoil has plunged China's once profitable steel industry into the red with many small steelmakers facing closure as supplies far exceed the demand.

"A major and clear part of the plan is the 2-trillion-yuan investment in railway construction over the next two years, indicating the need for around 50 million tons of steel.

In addition, low-income housing, rebuilding in disaster-hit areas and other construction projects will increase annual demand by 50 million tons," said Sun.

However, it still cannot fill the gap of over 100 million tons of steel between the yield of around 500 million tons and requirement of about 400 million tons.

"The way to save the steel industry is to restructure it through mergers and do away with small mills with low profitability and output," said Sun.

Luo Bingsheng, vice-chairman of China Iron and Steel Association, also said that the downturn is the best opportunity to restructure and revive the whole industry.

Analysts, however, said the stimulus plan is good news for the domestic cement market, which has been on a downhill path this year largely due to the stagnant real estate industry.

"We estimate cement demand to increase by approximately 100 million tons per year following the stimulus plan, largely offsetting the impact from the real estate slump," said Shi Lei, an analyst with Essence Securities.

"The Ministry of Railways plans to invest 600 billion yuan next year, double that of this year. Demand for cement from railway construction next year will add another 80 million tons," said Xie Yongyuan, an analyst with GF Securities based in Guangzhou.

"All of this will see the total demand for cement going up to 150 million tons," he said.