BEIJING China's bloated steel sector is facing a wave of closures in the next few years, with slowing demand and decades of "blind" expansion finally about to catch up with the industry, a senior executive and parliamentary delegate said.
Zhang Wuzong, the chairman of the privately-owned Shandong Shiheng Special Steel Group and a forty-year veteran of the industry, told Reuters in an interview that China's problems would also scupper the huge expansion plans of suppliers like Rio Tinto (RIO.AX)(RIO.L) and BHP Billiton (BHP.AX)(BLT.L), which have bet their future on sustained demand growth in China.
No steel firm will be immune, with the future of even state-owned firms like the loss-making Angang Group ASISG.UL000898.SZ at risk, he added.
"The Chinese market is now oversupplied," he said. "The government knows it and we know it. 'Survival of the fittest' is the only way to solve the problems."
"It will take time but I believe a lot of the backward private enterprises will be closed. I also believe there will be some state-owned enterprises that will be eliminated too, including some of the big ones. This is a certainty."
China has at least 900 million tonnes of crude steel production capacity, far higher than its official total output of 716 million tonnes in 2012. Profits in the sector fell 98 percent last year with many firms making losses.
The government said earlier this year that it would implement new policies to encourage mergers and close obsolete smelters, with the aim of bringing 60 percent of total capacity under the control of its top 10 mills by 2015.
"The best way a market can develop is on the principle of 'survival of the fittest' -- it is not a question of state-owned firms taking over private firms or the other way around, but which is the strongest," said Zhang, noting that current policies were mistaken because they distorted "market order".
By forcing better-performing firms to take over the nearly bankrupt, the government was making the situation worse. Angang's listed assets made losses of around 4 billion yuan ($644 million) last year, but the group company has also been forced to acquire other loss-making state-owned steel firms like Panzhihua Steel, despite having no economic rationale to do so, he said.
Zhang said his own company had shed around 2 million tonnes of crude steel capacity in the last few years to improve efficiency. Last year it was only the 64th largest steel mill by capacity, but the sixth most profitable.
Many larger firms, now saddled with capacities higher than the whole of Germany, will have to follow suit, but after assembling huge workforces, they remain under pressure to stick to a losing strategy.
Still, any hope that the government will come and bail them out could finally be dashed, Zhang said.
"Government support is extremely limited -- it's not like before when the government can find the money to help out a company that is facing bankruptcy. They just can't do this any more. They need to just let them die."
GRAPHIC: China trade suite r.reuters.com/fut96s
IMPACT ON MINERS
With steel demand already slowing and 2013 growth highly unlikely to beat last year's 3.1 percent, the big overseas miners were wrong to stake their future on China, and could also be facing massive future losses, Zhang said.
"China has driven the growth of Rio Tinto and BHP but they now are too dependent on Chinese demand, which cannot continue growing at the same rate as before," he said.
Rio Tinto expects Chinese steel production to peak at 1 billion tonnes a year around 2030. Rio, fellow Australian miner BHP and Brazil's Vale (VALE5.SA) together plan to lift their total iron ore production by about 60 percent to more than 1 billion tonnes a year over the next three years.
Even the development of China's western regions, which the miners have cited as one of the biggest drivers of global steel demand in coming years, will not be enough, says Zhang.
"Western development is going to happen, but it won't be the same as in the east. It also won't rely on foreign iron ore. There are big domestic mines in the west that will go into operation, and it is irrational to think that BHP or Rio Tinto will be able to deliver their cargoes to places like Sichuan."
Sichuan, in western China, lies about 1,500 km inland.
When Zhang first got into the steel business in 1976, total capacity stood at around 30 million tonnes, he said, and it is now thirty times larger. Any further expansion was impossible.
"It is just unsustainable -- demand isn't going to rise that much, Chinese energy and infrastructure cannot support it." ($1 = 6.2147 Chinese yuan)
(Reporting by David Stanway; Editing by Richard Pullin)