For Andy Lin, the last quarter of the year used to be his busiest time. As the human resources director of Hebei Yuansheng Iron & Steel Co Ltd, he would start to work on the annual review of the company's some 1,000 employees and then prepare their bonus packages.

But there won't be any bonus this year.

About a month ago, Lin's company, a small steel mill in Wu'an, Hebei province, had to suspend its operations as months had gone by without any new orders and stockpiles continued to build up. Most of the plant's workers were then sent back home, without knowing when they would return. Now, only a handful of employees still go to the plant every day to look after the once busy site.

"Most of Wuan's steel firms have closed down," says Lin. "It looks like we won't be able to resume production by the end of the year."

Lin's company is just one of the steel mills struggling to survive a downturn in China's steel industry. Thanks to a property slump and the global economic slowdown, the sector has come to a crossroads after a five-year boom.

Turning point

Established in 2002, Lin's company mainly produced steel bars widely used in the construction industry. Trying to ride the property market boom, the company more than doubled its annual production capacity to 1 million tons in 2006. And over the past two years, it had little to worry about except how to cope with orders that kept flooding in.

The company's fast expansion epitomized the blistering growth of the entire steel industry. Between 2002 and 2007, the nation's steel production grew from 180 million tons to 489 million tons. Meanwhile, it also transformed from the world's largest steel importer to the largest exporter, with about one-eighth of its 2007 steel output sold overseas.

For many players in the steel sector, the sizzling growth over the past five years only appeared to be a prelude as analysts claimed the nation's ongoing urbanization and infrastructure construction would guarantee the sector's long-term prosperity. To back up their argument, they pointed out that the nation's average steel consumption was only 328.7 kg per capita in 2007, about one-third of Japan's.

Yuansheng was one of the optimists. Last September, it decided to build a 400 million yuan factory in North China's Shanxi province, with an annual production capacity of 300,000 tons.

Yet, a real estate slump and the worsening economic slowdown changed the whole scenario. In the first half, housing sales in large cities such as Beijing and Shanghai dropped to the lowest level in recent years, forcing cash-strapped developers to postpone or even cancel new projects. Moreover, overseas demand, which absorbed about one-eighth of China's steel output, also started to wane as the nation's steel exports declined 2.1 percent year-on-year to 48.5 million tons in the first three quarters. And analysts say the slowdown in the steel sector may last through 2009, despite the government's recent decision to increase infrastructure investment.

Falling demand has triggered a landslide in steel prices, which industry insiders say is as much as 60 percent. Besides squeezing the profit margin, the price drops also mean stockpiles could be a loss for steel mills.

Lin's company managed to sell 30,000 tons of steel bars from its warehouse over the past two months, but instead of making a profit, it lost 50 million yuan.

"There are still about 20,000 tons lying in the warehouse," says Lin. "We just can't find buyers now."

According to China Iron and Steel Association, most large steel firms have only managed to break even since July and most small- and medium-sized mills were already in the red. By October, the whole steel industry started to suffer losses and more than 40 percent of small- and medium-sized steel companies in Hebei and Henan provinces have shut down.

In October, a number of leading steelmakers such as Baosteel, Shougang and Angang decided to cut their production by 20 percent.

"We have come to the turning point," Xu Lejiang, chairman of Baosteel Group, told a recent industry conference, adding later that the largest Chinese steelmaker would further adjust its production if demand continues to slide.

Reshuffle time

Analysts say a reshuffle is in sight for the steel industry as some small players may soon be forced out of the game and deep-pocketed State-owned companies may gain increased dominance of the sector following consolidation.

"Further consolidation is the most effective way for steel firms to cope with the current difficulty," says Wang Xiaoqi, head of the Planning and Development Bureau under the State-owned Assets Supervision and Administration Commission. "In the next few years, we will try to increase the steel output of major State-owned companies to more than 25 percent of the nation's total."

Wang estimates that China will have one or two steel firms with an annual production capacity of more than 100 million tons and three or four with over 50 million tons in the next few years, most of which will be State-owned. Currently, Baosteel Group has an annual steel production capacity of 30 million tons.

"The downturn offers a great opportunity for merger and acquisitions," says Xu. "For Baosteel, we now have more options and the price could be lower. We are interested in some privately owned mills."

Industry insiders say Baosteel has been studying a possible merger with Jiangsu Shagang Group. Shagang Group, with an annual steel production capacity of 25 million tons, is now the nation's second-largest steel producer. A major steel merger has already taken place this year, with the coming together of Tangshan Iron and Steel Corp and Handan Iron and Steel Corp in June to form Hebei Iron and Steel Group Co.

Baosteel is not the only firm that expects to benefit from the downturn. An anonymous source reveals that Tata Steel, India's largest steelmaker, is also on the hunt.

"Tata Steel is even considering being a minority shareholder," the source says. "The current downturn means there could be pretty good bargains."

According to the source, the government's 51-percent cap on foreign ownership in steel joint ventures has been the main obstacle to Tata Steel's further investment in China.

"It felt that without a controlling stake, it might meet great difficulty in the restructuring process," the source says. "But a recession is an irresistible opportunity for buyers."

A slowdown in the nation's steel industry would also end the six-year-long boom enjoyed by iron ore producers.

In that time iron ore prices almost quadrupled, thanks to surging demand from countries including China. Hoping the global economic slowdown will only dent iron ore demand slightly, the world's three largest global iron ore producers - Brazil's Vale, Australia's Rio Tinto and BHP Billiton - are now considering raising the long-term contract price for iron ore in 2009.

However, the China Iron and Steel Association forecasts global steel production will stop rising in 2009. It also says China's steel production will barely rise in 2008, compared with previous forecasts of growth between 5 to 10 percent. In addition, 10 major domestic steelmakers, including Baosteel and Hebei Iron and Steel Group Co, have said they will need a price cut for 2009.

"If they could bring the ore price down, it would give some relief to the mills," says Lin. "But our concern now is whether we can survive this winter."

(China Daily November 3, 2008)