China's steel demand seen shrinking for a third straight year -CISA

DALIAN, China, Sept 22 (Reuters) - China’s steel demand is likely to drop for a third year in a row, an industry official said on Thursday, as mills in the world’s top producer focus on reducing capacity.

China’s crude steel consumption slipped 1.9 percent over January to July and there may be a slight drop for the year, said Wang Liqun, vice chairman of the China Iron and Steel Association (CISA).

“For the whole year, the rate of decline may be smaller,” Wang said on the sidelines of an industry conference.

Driven by a drop in China’s steel inventory levels amid shutdowns in the past year, steel prices have rallied more than 40 percent from end-May to mid-August, but have since fallen back as output recovered.

The price rally helped boost steel margins among member mills of CISA, which includes major producers such as Baoshan Iron and Steel (Baosteel).

On average, profit margins among mills stood at around 1 percent in January-July, Wang said. Data from Baosteel shows margins were at minus 2.2 percent for China’s large and medium-sized steel mills last year.

For the rest of 2016, it would be very difficult for the margin to rise further “but if we can keep it at 1 percent it would be very good”, CISA’s Wang said.

Ji Chao, assistant to Baosteel’s president, said the market needs to “get used to this new scenario of slower, steady growth in demand”.

At the moment, the priority for China’s biggest listed steelmaker is to reduce capacity, in line with Beijing’s efforts to tackle a chronic glut, Ji said at the conference.

Baosteel has pledged to cut its production capacity by 9.2 million tonnes in three years. It is also taking over loss-making Wuhan Iron and Steel to create the world’s No. 2 steelmaker as part of Beijing’s push to overhaul the stricken industry.

Faced with global anger from Asia to the United States and Europe over a flood of cheap Chinese steel products, Beijing has promised to cut steel capacity this year by 45 million tonnes and by 100-150 million tonnes over five years.

By the end of July, China had only achieved 47 percent of its 2016 target and steel exports in the first eight months had risen 6.3 percent from a year ago to 76.35 million tonnes.

The consolidation and capacity cuts in China’s steel sector are meant to strengthen the competitiveness of domestic producers and should not just be a matter of meeting target numbers, said Wang. (Reporting by Manolo Serapio Jr.; Editing by Himani Sarkar)