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Posted on: Saturday, July 2, 2005

China's appetite for steel insatiable

By Elaine Kurtenbach
Associated Press

SHANGHAI, China — Not since the Great Leap Forward of nearly a half-century ago, when revolutionary leader Mao Zedong ordered the nation to build backyard steel mills, has China's steel industry changed so much, so quickly.

Machines toil at a steel mill on the outskirts of Beijing. Not since re-volutionary leader Mao Zedong ordered the nation to build backyard steel mills, has China's steel industry changed so much, so quickly.

Elizabeth Dalziel • Associated Press

With construction and manufacturing booming as the economy grows at a rate of 9.5 percent per year, China's appetite for steel seems insatiable: It consumed 258 million tons last year, a third of all steel used worldwide. Demand this year is expected to reach 310 million tons or more.

The China factor has more than tripled selling prices in the past three years as the surge in demand turns one-time gluts into shortages. Prices for key ingredients like iron ore and coal have doubled.

China also has captured the attention of steel companies around the world — companies whose short-term benefits are balanced by long-term concerns about how serious and fair a competitor it will be in the new global market.

"China produces and consumes an amount of steel way beyond what is normal for an economy of its size," says Peter Morici, an industry consultant and professor at the University of Maryland. "It has the potential to significantly disrupt global steel markets."

Since the days of Mao's disastrous 1958-1961 "Great Leap" experiment — when communities melted pots, farm implements and even doorknobs to meet sky-high targets for steel output — this communist country has viewed steelmaking as a barometer of industrial progress.

Chinese mills turned out 273 million tons of crude steel last year, about as much as the United States, Japan and Russia combined, and a quarter of the world total. This year, output is expected to exceed 300 million tons.

China's recent rise as a global steel power has been led by Shanghai Baosteel Group, a state-owned industrial showcase on the banks of the Yangtze River, north of downtown Shanghai, that is the country's biggest, most modern steel manufacturer.

Baosteel has been groomed since its founding in 1978 to compete with the global giants. And as it and other Chinese steel mills retool, boosting production of the high-quality steel in greatest demand, they're beginning to do just that. Baosteel quickly became the country's biggest steelmaker, surpassing older mills with outdated equipment and redundant and retired workers.

Some of Baosteel's global competitors fret that China and a few other fast-producing countries such as Brazil may one day produce so much steel they will outpace global demand, driving down prices.

"We now have probably the most irrational global capacity expansion in this business that the world has ever seen," said Bob Jones, an executive at the U.S.-based Nucor Corp.

There are other concerns, including fear of government intervention in the form of currency manipulation that benefits the home nation and subsidies that some say make for an uneven playing field.

Brazilian steelmakers, for example, get tax breaks on their steel exports and also have access to preferential financing, U.S. trade investigators have found. And in China, state-owned steelmakers have long been backed by state banks that often enough end up writing off unpaid loans.