UPDATE 3-China orders steel output cut, steelmakers surge

* China tells 48 steel mills in Hebei to cut or shut output

* China has around 100 mln tonnes in excess steel capacity

* Output limits lifts long steel products prices (Recasts, adds comments, updates share prices)

By Ruby Lian and Manolo Serapio Jr.

SHANGHAI/SINGAPORE, Sept 7 (Reuters) - Asian steelmaker shares soared as China intensified a curb on mill output, though analysts warn more work is needed to trim oversupply in the world's top producer.

The latest production cuts are focused on China's steelmaking hub of Hebei province where about 30 mills were ordered to cut output by up to 70 percent from September while another 18 were told to close down for up to a month. [ID:nTOE686028] [ID:nTOE68502P]

"It's not really going to remove the capacity forever. After the campaign, the steel mills can easily resume operations," said Judy Zhu, commodity analyst at Standard Chartered Bank.

"If you really want to remove capacity, you have to raise electricity prices and raise their production costs to make them loss making," said Zhu, adding that the orders in Hebei would shutter 14.4 million tonnes in capacity.

Tangshan Steel, the city's biggest mill, has been told to curb its crude steel output to 1 million tonnes per month from September to December, according to the government notice seen by Reuters, which cited a target for saving energy.

Hebei's wave of production cuts follows moves by several other provinces, such as Zhejiang and Shangdong, to cut power supplies to steel mills to save energy, sparking a 16 percent surge in steel prices on the Chinese domestic market since July.

The power-led output cut could remove 25 million tonnes in annual capacity in coming months, according to Credit Suisse.

Still that represents just over 4 percent of China's record crude steel output of 568 million tonnes in 2009, and perhaps a quarter of the nation's excess supply

The country, the world's largest producer and consumer of steel, is forecast to make more than 600 million tonnes of crude steel this year.

Zhu estimated that there was around 100 million tonnes in excess steelmaking capacity in China, with total capacity seen at around 740 million tonnes.

STEELMAKERS JUMP

Still, the decree to cut or shut output at inefficient and smaller steel operations boosted share prices of Asian steelmakers.

Shares of South Korea's POSCO (005490.KS), the world's No.3 steelmaker, jumped 4.5 percent and those of Japan's Nippon Steel (5401.T) and JFE Holdings (5411.T), the world's fourth- and fifth-largest, respectively, gained 2.4 percent.

"Beijing has been looking to close or consolidate smaller steel mills for years. They held back during the financial crisis, but now that the country is emerging relatively unscathed they are starting back up," said John Meyer, analyst at London-based investment bank Fairfax.

"If China does cut output and demand remains strong, other producers will not have to compete with Chinese exports and we could well see a further hike in prices and wider margins as iron ore prices are expected to fall." <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

For a graphic on China's steel production, click:

link.reuters.com/xyn79n

For global steel output:

link.reuters.com/gap79n

For the impact on shares of steelmakers: link.reuters.com/vyn79n

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

China's vast steel sector produced almost half the world's steel last year but, with around 20 percent overcapacity, it could have produced even more. Output has soared further this year before wavering in July amid fears of a supply glut.

The government, which controls the biggest players in the highly fragmented sector, is keen to whittle the industry down to a handful of big companies.

But its efforts have been stymied by competition from the thousands of small mills that often proved more nimble and savvy than their lumbering state-run rivals and were encouraged by local governments to keep jobs.

The latest drive, also part of a renewed push for energy efficiency in the decade to 2020, may at last be starting to bite.

But some mills will try to skirt the crackdown by using their own power supplies.

"A few steel mills may not really cut output by such a large extent finally, but instead to use their own power generators to minimise output losses," said an official from a 4 million tonne per year steel mill, which is planning to shut down one small blast furnace first.

Hebei, the largest steel-producing base in the country, has borne the brunt of the government's efforts to crack down on inefficient steelmaking outfits.

"All the thirty steel mills have received the notice, and we are told to cut output by more than 70 percent in the rest of this year, starting soon, and now we are discussing internally how to meet our customers' demand," said a senior official from Jinxi Steel, the country's leading H section producer.

Jinxi Steel will have to control its monthly crude steel output to 160,000 tonnes per month during the remaining months from its previous 600,000 tonnes per month, the official added.

REBAR FUTURES STAY HIGH

"With Chinese mills shut down during the seasonally busy September-October period, spot product pricing will be good for steel manufacturers," said Jeon Seung-hun, an analyst at Daewoo Securities in Seoul.

Prices of reinforcing steel bars, or rebars, in China climbed on the output suspension with futures staying near four-month highs touched on Monday. [IRONORE/]

"You're going to see traders sitting on material because they think the market is going to get tighter and that in itself will make the market tighter," said Graeme Train, analyst at Macquarie in Shanghai.

Train said the cuts would hit different steel products differently.

"Overall this seems to be more positive for long products than for flat products because most of the mills that are targeted by the shutdowns are long product producers and that market is already getting pretty tight so it's just another reason to be positive on the long products."

Spot prices for rebars, widely used in construction, stood at 4,250 yuan per tonne in Shanghai on Tuesday, up 200 yuan from a week earlier, industry consultancy Mysteel said.

In the Shanghai FUtures Exchange, the most active January contract SRBc5 dipped 0.4 percent to 4,568 yuan a tonne, but after rising as high as 4,592 yuan, a four-month high first hit on Monday.

($1=6.787 Yuan) (Additional reporting by Nick Trevethan in SINGAPORE and Jung Youn Park in SEOUL)