UPDATE 2-China seeks slimmer, more efficient steel sector

(Adds link to a FACTBOX about China's top steelmakers in 2008)

By Aileen Wang

BEIJING Feb 18 (Reuters) - China is considering raising steel industry standards to force its mammoth steel sector to slim down and consolidate, leaving China -- the top producer and consumer -- with a few globally competitive steelmakers.

The country's central government will restrict steel production, force mills to move to coastal regions and ditch inefficient equipment under a draft proposal being discussed by the government, an industry source said on Wednesday.

The draft plan would limit China's crude steel output from 2011 onwards to 500 million tonnes a year.

That restriction may not take much of a bite out of existing production, since last year crude steel output was 500.49 million tonnes. But China has huge surplus capacity after its runaway economic boom of the last few years.

The plan would also require 40 percent of steelmaking capacity to be located in coastal areas, up from 35 percent now, but the government would put a mechanism in place to help companies assist those losing their jobs.

That move could put more steelmakers in the most economically developed areas of China and within reach of imported iron ore, coking coal and other materials, cutting costs and increasing competitiveness.

The plan would also increase the minimum size of blast furnaces from 300 to 400 cubic metres and the minimum size of converters, which turn melted pig iron into crude steel, from 20 to 30 tonnes.

The government is expected to finalise the package of measures by the end of this month, the source said.

The country's largest steelmaker is Baosteel Group, the parent company of Baoshan Iron and Steel Co Ltd (600019.SS), but the fragmented nature of the sector means that it accounts for less than 10 percent of crude steel production. (To see a factbox showing China's leading steel makers in terms of production in 2008, please click [ID:nSHA172574])

"The draft means the country will force the industry to consolidate and offer more advantages for its state-owned majors to acquire smaller rivals," said analyst Henry Liu at Macquarie Bank.

China, which accounts for more than a third of global steel output, has been urging the sector to optimise itself as the fragmentation of the industry reduces its efficiency and weakens its bargaining power over raw material prices.

China's policymakers have long wanted to bind the sprawling sector into a few big players, hoping to have 10 steelmakers account for half the country's production instead of 20.

The plan, which aims to improve efficiency and cut pollution as well as adding to China's bargaining power, would gain traction as the economic crisis forces once swaggering steelmakers to look for ways to survive the economic meltdown.

Late last year, Tangshan Iron and Steel Co 000709.SZ, the listed unit of what was China's third-largest steel mill, agreed to merge with two smaller rivals into the country's biggest listed steelmaker, creating a second Chinese industry champion in the world's top five steel producers.

The merger followed the creation of Shandong Iron and Steel Group in March from the state-owned parents of Laiwu Steel Corp 600102.SS and Jinan Iron and Steel Co (600022.SS) and the formation of Anben Iron and Steel Group in northeastern Liaoning province three years ago.

(Writing by Alfred Cang; Editing by Keiron Henderson)