China's insatiable lust for steel is likely to fall off sharply after the 2008 Olympics in Beijing as the nation's steelmakers face overcapacity amid fierce global competition, industry experts say.
Within a few years the country's consumption trends will be more in line with those of the developed world meaning that production, set to come online in the coming years, could find itself underutilized, said Neville Tindale, Asia-Pacific president of Canadian engineering firm Hatch Beddows.
"The growth we've seen over the past two or three years, approaching 20 percent a year, can't be sustained forever though the outlook is still very positive, particularly in the short-term," he said. "It will still grow but that growth will level out if we look, certainly beyond the Olympics in 2008, if not before."
With the global economy still struggling to find its feet following the 1990s investment binge, China has become the main driver of the steel industry.
Consumption, which repres-ented nine percent of total global demand in 1991, is expected to account for just under a third of the total expected demand of 802 million tonnes this year, according to the International Iron Steel Industry.
At the same time, China will account for 5.20 percentage points of the 6.40 percent growth in global demand this year.
This has not been lost on foreign steel producers who are charging into the country to tie-up with Chinese producers and increase their investments.
Last week, South Korean giant Posco announced it would be investing US$700 million in a new stainless and hot-rolled steel venture in Jiangsu Province, betting it can widen its lead as the world's most profitable steelmaker.
"China is incredibly important right now, and is by far the largest steel producer and consumer in the world," Tindale said.
Chinese officials appear to have a near love-hate relationship with the steel industry -- it is recognized as central to the auto and real estate sectors, key mainstays of the economy.
But a tidal wave of investment has sparked worries that steel production is one of the dangerously overheated sectors of the economy, and in May led to a government warning to rein in expansion plans in the provinces.
Money however continues to pour into private sector projects which are notoriously difficult to regulate and signs of overcapacity will emerge once demand growth tapers off, Tindale said.
Chinese steel demand growth is expected to begin to level off as consumption along the eastern seaboard nears 800kg to 900kg per capita a year within four to six years, from the current level of about 500kg.
"There hasn't been proper due diligence or rigorous feasibility studies for many of those plants so that could mean that there will be some excess capacity in some areas in four to five years time which would mean much stronger pricing competition," Tindale said.
Such a trend could be countered by more government spending -- a move economists have said would lead to more capital destruction after five years of pump priming -- or if China's role as the world's manufacturing base increases.
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