The government-backed plan announced in January to support the steel and iron industry will accelerate the process of phasing out less efficient and high polluting steelmakers, said Xie Qihua, the former president of Baosteel Group Corp, in an interview with China.org.cn in a side-session to the ongoing assembly of the CPPCC, China's top political advisory body.

The Chinese government has been trying for some time to consolidate the highly-fragmented steel industry by putting production in the hands of larger, more efficient mills that cause less pollution, while encouraging small, inefficient and highly-polluting mills to close.

Baosteel, China's largest steelmaker, recently signed an accord to acquire control of Ningbo Iron & Steel Co., setting off what is likely to be a wave of M&A in the near future.

"It is a sign," said Xie. "The banks have stepped in to finance the merger, showing that the government is encouraging such actions."

It is reported that China Construction Bank and the Bank of Communications have offered a loan of 1.15 billion yuan (US$170 million) to Baosteel, nearly 50 percent of the capital required for the merger.

Faced with a sharp decline in foreign and domestic demand since the fourth quarter of last year, 19 listed domestic steelmakers have issued profit warnings for this year.

"There will be rising domestic demand as a result of the 4 trillion yuan (US$586 billion) stimulus package," she said. "But it will take some time to feed through into increased steel demand from construction sector."

As the global market struggles, she suggests that steelmakers should focus on the domestic market. Currently, the Chinese producers are in annual price talks with the world’s three largest iron ore suppliers, looking for a price cut of the order of 40 to 50 percent.

"It is hard to say whether the global crisis will put the Chinese steelmakers in a better negotiating position," said Xie. "Prices will be ultimately be driven by demand and supply."

(China.org.cn March 8, 2009)