China's steel industry urged to continue downsizing

A senior figure in the Chinese steel industry has called for further cuts to steel capacity, saying the sector remains saturated, despite increased profits and production of steel mills in the first quarter.

"The whole industry needs to press ahead with cutting capacity and de-leveraging," said Gu Jianguo, executive vice chairman of the China Iron and Steel Association (CISA).

He warned against steel price volatility and falling exports in an article published Monday on the CISA website.

Gu's remarks came after unexpectedly strong performance in the steel sector this year.

Thanks to recovery in the broader economy, CISA's members posted combined profits of 23.3 billion yuan (3.4 billion U.S. dollars) during the January-March period, in contrast with a 8.75 billion yuan of losses a year ago.

China's total crude steel output in the same time rose 4.6 percent year on year, with daily production in March hitting a record high.

Encouraged by the the unexpected good news, unfounded optimism is blooming in the oversupplied sector, which Gu describes as "near-sighted."

Highlighting lingering problems, Gu said "more observation is necessary" to forecast the full-year economic outlook, and steel demand and consumption.

Plant managers should be clear-headed, Gu said, asking them not to "blindly increase production."

Officials in a high-level meeting last month agreed steel capacity has not changed fundamentally and the recent price rally could result in vulnerabilities. Capacity cuts are still necessary this year.

Steel production capacity should be cut by around 50 million tonnes and coal by at least 150 million tonnes this year, a key part of supply-side structural reform.

Gu called on steel plants to cooperate with government to eliminate inferior steel products, shut down "zombie enterprises" and curb new capacity. Endi