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The 3.5 trillion yuan investment for the construction of a series of railway projects in next three years is expected to be a blessing for steel and building materials producers who have taken a hard blow from the dwindling domestic and overseas demand.

The Ministry of Railways estimates that railway projects will need 20 million tons of steel next year.

A steel industry estimate says that the railway investment could create a fresh demand of about 5 million tons or more consumption of crude steel in the next several years.

Zhang Ping, a senior steel industry analyst at Umetals, a leading domestic metal consultancy, tells China Business Weekly: "The projected increase in steel consumption, boosted by demand from the new railway projects, will benefit steel companies, many of whom are now operating at a loss because demand has been depressed by declining car sales and the sagging property market." These factors, Zhang says, have continued to drag down steel product prices."

Prices of different steel products in China's market have dropped by an average 25 to 40 percent from the peak in June.

The price drop in downstream products plus having to buy imported iron ore at much higher contract prices than spot prices has combined to erode steelmakers earnings and forced many of them to drastically reduce output.

Latest figures compiled by China Iron and Steel Association show the profit margin of 70 leading steel enterprises in August dropped by 2.54 percentage points to 4 percent, the lowest since March 2006.

The leading 71 steel enterprises in September posted a combined realized profit of 3.2 billion yuan, down 72.86 percent from the year earlier. More than 30 percent of the enterprises suffered losses that month.

In Hebei province, home to many small steelmakers, about 40 to 50 percent of the steel mills have closed down.

Since August, domestic steelmakers have collectively cut production by 20 to 30 percent.

"Against such an economic backdrop, we have no choice but to cut production to combat the continuous price drop of steel," says Li Bing, director of the mining resources trading department at Ma Steel, adding that his company has cut production by 30 percent since October.

Steel production in September dropped 9.1 percent from the year earlier period. It was the third consecutive monthly production drop in 2008.

But some industry experts and analysts still worry that the projected increase in demand for steel and other building materials may not be high enough to solve the industry's problems of high inventory and over capacity.

"The huge investment is expected to benefit a select number of heavy machinery manufacturers and steel producers, whose products are directly related to railway construction," says Li Xin, a steel industry specialist at China Chengxin International Credit Rating Co, which is an affiliate of Moody's Investors Service.

Zhang Ping at Umetals agrees. "It depends on the schedule of the railway construction project," he says. But details of the expenditure for the entire project, which is expected to take years to complete, has not been released.

Prices of hot-rolled coil in China have fallen to around 3,150 yuan per ton from the record level of 5,957 yuan in June, while the crude steel output was down 9.1 percent year on year in September and production is expected to contract further in October.

The recently announced hike in value added tax rebates for more than 3,000 product items, which began on November 1, did not extend to steel products. Further increases in steel export rebates may be applied to higher value-added products such as cold-rolled coil and stainless steel, possibly boosting the rebate to 10 percent, from 5 percent at present, analysts say.

Industry experts expect China's output growth for steel products to moderate to 6 to 7 percent this year and approximately 3 to 5 percent in 2009, from 30 percent in 2007. Against a backdrop of weaker market conditions, several industry observers expect contract iron ore prices to decline in 2009.

(China Daily 11/17/2008 page3)