(Yicai) April 24 -- Chinese steel producers are facing a “sharp decline” in business performance due to falling prices alongside high raw material and fuel costs, according to the deputy head of the China Iron and Steel Industry Association.

“Due to the significant decline in steel prices while raw material and fuel prices remain high, the operating performance of Chinese steel enterprises has seen a sharp decline since the start of this year, resulting in cash flow strain for some,” Jiang Wei said in a keynote speech at the 20th Iron and Steel Industry Development Strategy Conference that ended on April 21.

Official data published last month back that up. In the first two months of the year, the country’s iron and steel industry racked up its biggest loss in the past 25 years. At CNY14.6 billion (USD2 billion), the loss was CNY4.5 billion (USD621 million) bigger than a year earlier, according to figures released by the National Bureau of Statistics.

Steel prices fell quickly in China after the lunar new year holiday in early February, mainly because of the ongoing downturn in the real estate market and slowing investment in new infrastructure, according to the association. That has led the industry into a situation of increasing production while losing money.

China has turned out more than 1 billion tons of crude steel annually for four straight years, while consumption has fallen for three years in a row, Jiang said, adding that that is unprecedented.

The trend continues this year. In January and February, production rose 1.6 percent to 168 million tons from a year ago, while consumption fell 1 percent to 153 million tons.

In turn, that pushed inventories at steelmakers to an historic high of 19.5 million tons as of March 10, up 8.4 percent from 10 days earlier and 10.3 percent on an annual basis, said Jiang, who is also the industry association’s secretary-general. Higher inventories mean narrower profit margins, he noted, adding that reducing them as soon as possible must be the industry’s top priority.

Given the difficult situation, the industry needs to arrange production in strict compliance with the output restrictions approved by regulators, Wu Wenzhang, chairman of Shanghai Steelhome E-Commerce, told Yicai. 

Meanwhile, to make sure steel mills do not breach output limits, thereby avoiding sustained losses across the industry, regulators need to review and assess the industry’s compliance with more indicators, such as energy consumption, water usage, waste gas and solid waste volumes, as well as carbon emission indicators, Wu said.

The government is also laying plans to include the steel industry in the national carbon emissions trading market, which should force producers to eliminate outdated capacity as soon as possible, Jiang pointed out.

Still, the structural nature of the current oversupply must be acknowledged and tackled accordingly, Wu said. The chief glut is in products used in construction and other common items, while demand in some sectors, such as the auto industry, is fairly robust, he added.

Editors: Tang Shihua, Futura Costaglione