Chinese steelmakers are dealing with a substantial oversupply problem that will likely force them to transform the way they do business.
A report posted on the China Iron and Steel Association (CISA)'s website on Monday said that a weak economic recovery, low demand, high prices for raw materials and high steel output have caused an oversupply of steel products.
The report, which was compiled by the Laigang Group, a major iron and steel corporation based in east China's Shandong Province, said unfavorable industry conditions will remain in July, a slack season for the manufacturing industry.
Although an overall urbanization plan is expected to be reviewed in July, it is not likely to affect the iron and steel industry in the short-term, according to the report.
The International Monetary Fund (IMF) recently cut its forecast for China's 2013 economic growth from 8 percent to 7.75 percent, indicating slower growth for the country's economy, the report said.
However, figures from the National Bureau of Statistics showed that steel output increased by 11.3 percent year on year to 91.19 million tonnes in May. In the first five months of the year, steel product output rose 10.8 percent year on year to reach 426.16 million tonnes.
Meanwhile, the Complex Steel Price Index (CSPI) released by CISA dropped by 13.35 percent year on year to hit 101.83 by the end of May, down 3.71 percent from that of April.
The industry profit frate was only 0.23 percent in the first four months and 40 percent of large and medium-sized steel businesses suffered operational losses, according to CISA.
Under such circumstances, steelmakers are trying to find ways to cope. He Wenbo, general manager of the Shanghai-based Baosteel Group, said developing high-tech products is one of them.
The company has developed a type of steel called ultrafort steel that is thinner, lighter and stronger than traditional steel. A vehicle made out of ultrafort steel can travel farther on less gasoline while remaining safe to drive.
However, He said high-tech steel products that were once considered to have high value, such as ship sheet, auto sheet, steel tubing and silicon steel, are also in a state of oversupply due to excessive investment and fierce competition.
Wang Yifang, chairman of the Hebei Iron and Steel Group the group has worked to fine-tune its management to reduce costs.
The group is China's largest crude steel producer, with over 69.2 million tonnes of crude steel produced last year, or 10 percent of the country's total.
Xu Kuangdi, director of the Chinese Society for Metals, said the oversupply problem may take at least five to 10 years to be solved.
He said at an academic conference held in early June that the U.S., Europe and Japan have also had oversupply problems in the past.
A study by the EU showed that the steel sector usually enters a state of oversupply after a period of high-speed economic growth.
The EU spent about 20 years solving the problem, according to Xu.
"Chinese steelmakers should learn lessons from companies in other countries," he said.
The government has also been advised to utilize legal or market means to help tackle oversupply.
Zhu Junhong, president of information provider MySteel, said the government should strengthen control over the industry through environmental protection regulations, taxation and credit controls.
Zhu also advised the government to offer subsidies to companies that cut production capacity and help laid-off employees find new places to work.