China plans to create three steel giants by 2011

China is preparing a three-year plan to consolidate its steel industry, engineering the rise of three major steel groups as it cuts excess capacity.

Beijing will also use government-backed funds under the plan to help Chinese steel mills in their quest for resources abroad.

Shanghai-based Baosteel Group Corp., Wuhan Iron & Steel (Group) Corp., and the combined group led by Anshan Iron & Steel Group Corp. and Benxi Iron & Steel (Group) Co. will lead the consolidation, according to a draft of the government plan reviewed by Dow Jones Newswires.

The three will emerge as China's steel giants, with each having a capacity of over 50 million metric tons by 2011. In addition to the three, the country also plans to create several steel mills with capacities of 10 million tons to 30 million tons.

Such a consolidation may have global repercussions, as China is the world's largest steel producer, consumer and exporter.

The State Council, China's cabinet, gave the green light to the proposal Jan. 14 and the government is expected to announce the detailed plan by March, said Zhang Xiaogang, outgoing chairman of the China Iron and Steel Association.

Under the plan, China will support and protect its local steel industry by gradually raising import duties on some steel products that could be sourced locally, the document said. The duty changes will be made in the first quarter of this year.

The revamp comes at a critical moment as Beijing tries to stem the slowdown in the world's third-largest economy. It has rolled out a series of stimulus measure targeting specific sectors hit by the downturn.

The move follows a sudden reversal in the fortunes of China's steel industry -- with both demand and prices falling in recent months amid the global slowdown.

Crude steel production is expected to fall 8% this year to 460 million tons, while domestic steel consumption is likely to sink 5% to around 430 million tons, the draft plan predicted. China's direct and indirect steel exports are likely to halve in 2009.

The country will use special government-backed funds -- including a Foreign Economic and Technical Cooperation Special Fund and an Overseas Mineral Resources Exploitation Risk Fund, which were created by the Ministry of Finance in 2005 -- to support Chinese companies in their investments in overseas mineral assets, according to the plan.

The document said China will also tap an Overseas Mineral Resources Equity Investment Special Fund for this purpose, but it was unclear whether this fund had been set up yet. While the first two funds are seen as modest by industry participants, there are no estimates for the size of the last one.

Under the plan, Baosteel, the country's biggest steel producer by output and the world's fifth-largest, will merge with Inner Mongolia-based Baotou Iron & Steel Group and Ningbo Iron & Steel Co., a smaller rival in coastal Zhejiang province, just south of Shanghai.

Wuhan Iron & Steel and Anshan & Benxi Iron and Steel Group -- currently China's third- and fourth-largest producers by output, respectively -- will grow to include operations in other regions.

Anshan & Benxi will absorb Dongbei Special Steel Group Co., and Panzhihua Iron & Steel Group. The No. 2 producer, Hebei Iron & Steel Group, which has already undergone consolidation steps, was not mentioned in the draft document.

The plan, which will run through 2011, aims to stabilize China's domestic crude steel production around 500 million tons and consumption around 450 million tons. In 2008, China's crude steel output was 500 million tons and consumption totaled 453 million tons, the draft plan noted.

Crude steel-making capacity, however, was 660 million tons at the end of 2008, indicating massive overcapacity in the industry. The government plans to eliminate over 72 million tons of iron making capacity and 25 million tons of steel making capacity by 2011, the draft said.

Without timely measures to support the industry, 2009 could see China's steel consumption and production falling at the same time, the draft said.

According to data from CISA, the only other time when demand and output fell simultaneously was in 1981.

The draft estimates production and consumption will return to 2008 levels only by 2011.

China has been crafting a raft of stimulus measures to bolster steel-reliant industries such as automobiles and shipbuilding while also fast-tracking infrastructure projects under its massive 4 trillion yuan stimulus package.

While consolidating the domestic industry, the country will also seek to achieve a unified price for iron ore imports this year by letting the price of iron ore "decline to a reasonable level," the document added. China is the world's largest iron ore importer.

Last year Chinese steel mills were forced to pay different prices for iron ore from Brazil and Australia, based on the cost of shipping the ore.