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Country bans expansion of 'chaotic' steel sector

By Zhang Qi and Cui Xiaohuo (China Daily)
Updated: 2009-08-14 08:59

With China's steel industry in turmoil over the Rio Tinto scandal, the government has instituted a three-year moratorium on applications to expand production or start new projects.

China, the world's largest iron ore buyer, needs to have more say in the global iron ore trade, Industry and Information Technology Minister Li Yizhong said yesterday.

Specifically, the country is reacting to the steel industry's production overcapacity, the minister said at a press conference in Beijing.

The government will continue backing the China Iron & Steel Association in iron ore price negotiations, but will stop the "chaotic situation" and disorderly competition among Chinese importers to address the continuous rising spot iron ore price, the minister said.

"Spot prices of iron ore are increasing sharply on the global market and we hope to see an appropriate relationship between spot prices and long-term contract prices," Li said.

Li said he hoped the world's major iron ore suppliers would consider both their own long-term interests and their long-term cooperation with China's steel industry.

Li's remarks came as Chinese police and prosecutors continue the probe of a commercial leak that, in part, caused the current deadlock in price negotiations between Chinese steel companies and foreign ore suppliers, including Australia's mining giant Rio Tinto, the world's second- largest miner.

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The case involves four employees of Rio in its Shanghai office, who face years of imprisonment if convicted of trade secrets infringement and bribery.

Lawyers for the three local employees said yesterday that they still were waiting for permission to meet their clients. The lawyer for Stern Hu, an Australian national executive from Rio's Shanghai office, was still not known.

More Chinese executives are believed to be the next to be investigated, insiders have said, and the Shanghai-based Oriental Morning Post reported yesterday that two senior import executives from major steel company Shougang Group in Beijing and Laifu Steel Group in Shandong have been detained for their possible involvement in the case.

None of the companies yesterday denied the report. Press officials at both companies said they "were not informed about the process of the investigation".

Analysts said some executives might already have been investigated, and it is possible that the authorities might be using the case as a warning to those who benefit from the disordered situation in China's steel industry.

Yu Liangui, a senior analyst at Mysteel Research Institute, said the government's decision to stop production capacity expansion aims to control the unstable situation in the iron ore talks.

"China's steel capacity expansion is usually scattered among different steel mills, resulting in chaotic development, so the government's encouragement on industry consolidation and the tightening up of industrial capacity will enhance the country's steel concentration," Yu told China Daily.

Cao Li in Shanghai contributed to the story