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Beijing will shut small steel mills and encourage big and mid-sized domestic mills to merge, but would not look as kindly at acquisitions by foreign producers, a senior industry official told Reuters on Sunday.
China plans to use new environmental, energy and water consumption and product quality standards to close 30 percent of the country's shoddiest steel capacity, said Luo Bingsheng, secretary general of the China Iron and Steel Association.
"Foreigners taking a controlling stake in our major steel mills is against our iron and steel development policy. We have a batch of competitive steel mills, which can play an important role in the restructuring of the industry."
The new regulations, yet to be issued, will force outdated, polluting steel capacity to shut, Luo said.
"The top priority is legally eliminate steel mills with heavy pollution and high energy consumption."
The association opposes any foreign efforts to take a controlling stake in a Chinese mills, Luo said, citing Mittal Steel's talks with Baotou Iron and Steel (Group) Co for a 49 percent stake.
He said Arcelor would have difficulty getting central government approval of a recently signed deal to take a 38.41 percent stake in Laiwu Steel Corp Ltd.
Arcelor's share is equal to that of Laiwu's state-owned parent, although a provincial investment body owns another 1.19 percent.
Mittal, the world's largest steel firm, has launched a hostile take-over bid for Arcelor, the second-largest. Beijing is promoting co-operation between China's largest mill, Baosteel Group and Bayi Iron and Steel Co in Xinjiang.
It is also urging the merger of Shougang Group in Beijing with Hebei's Tangshan Iron and Steel Group, and of Wuhan Iron and Steel Co with Liuzhou Iron & Steel Group in Guangxi.
Luo forecast profit growth for the industry of between 5 percent and 7 percent this year.
China's steel industry produced a surplus of 45 million tonnes of steel in 2005, driving down prices and making it harder for the newly expanded mills to pay their debts.
"The overcapacity problem has provided a very good opportunity to promote restructuring in the steel industry," Luo said.
Local governments, which built steel mills to profit from China's booming economy, are expected to combat efforts to shut down their major employers and taxpayers.
The steel association targets steel output growth of 10 percent this year, after nearly 25 percent growth last year.
"If we produce more than the target, the output will exceed demand, which will hurt everybody's interests," Luo said.
"This year we will actively push for mills to produce only what they know they can sell."
Chinese industry is resisting any rise in iron ore prices during the year beginning April 1.
China won the right to a bigger role in the talks with iron ore suppliers after Chinese mills bitterly resented a 71.5 percent hike in prices last year. Talks are traditionally led by Japanese steel mills, the world's biggest term iron ore buyers.
"Talks are in a tough period," Luo said, adding that China's representative, Baosteel, is still pushing for a price cut.
The association has threatened to punish any steel mills that hold separate talks with miners, by not issuing them iron ore licenses this year.
Luo said Chinese mills have stockpiled enough iron ore to face down miner's demands for a higher price.
Port stocks of iron ore are at about 35 million tonnes, steel mills hold 22 million tonnes of inventory and domestic miners hold another 5 million tonnes, Luo said.
"If there are no iron ore imports for two months, steel mills will not be hurt."

Copyright Reuters, 2006

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