FATIGUE FEARS OVER CHINA'S EXPORTS

Could Chinese steel exports bring the industry's party to an end?

That is the question on the minds of steel executives as they consider the chances of a four-year boom in the sector juddering to a halt sometime during the next 12 months.

Since the middle of 2003, share prices of quoted steel stocks have trebled compared with the average price of all listed groups worldwide.

The spurs have been a surge in demand, particularly from China, and consolidation efforts in the industry that have produced bigger groups more capable of dictating prices.

But the trend worrying many has been a large rise in exports from China in the past 18 months, tipping the country from being a small net importer of the metal in 2005 to a net exporter last year of 35m tonnes.

This year, steel exports from China could be as high as 70m tonnes, based on the large trade flows in the first four months, according to some industry observers.

They are concerned that this amount of extra material coming on to world markets could depress steel prices, which have doubled in the past four years, and result in a reversal of the large profit rises that have made steel groups favourites among investors.

Another consequence could be to damp the climate for mergers and acquisitions that has been a feature of the sector.

John Tulloch, chief commercial officer of Ipsco, a Canadian maker of specialist steel plate and pipes, which is being bought by SSAB of Sweden for $7.7bn, said: "The flow of steel from China to the rest of the world is potentially destabilising.

"It's being driven by a rise in steel production capacity in China, which in my opinion dwarfs the capability of markets in Asia to absorb the extra material."

Ugur Dalbeler, chief executive of Colakoglu Metalurgi, a Turkish maker of steel rod for the construction industry – a sector that has seen hefty price rises in the past few years – said: "I feel the threat [of high Chinese steel exports] is getting closer."

Last year, China accounted for 34 per cent of world steel output of 1.2bn tonnes, and so far this year, steel being made by the country's mills is up by about one fifth compared with the same period in 2006.

The production surge worries Barry Solarz of the American Iron and Steel Institute, a trade body representing US steel makers.

Mr Solarz said much of the extra production – and exports – were being driven by subsidised loans and other help to Chinese steel producers, most of which are controlled by the state.

Wu Jingjing, of the China Iron and Steel Association, representing the Chinese steel industry, intensified the concerns of many non-Chinese steelmakers when he told a steel conference in Istanbul last week that progress towards consolidation in the sector was proceeding much more slowly than the official Beijing policy appears to require.

Many non-Chinese steel observers have tended to applaud the government's ideas to encourage Chinese steelmakers as a means of making the steel industry more globally competitive.

The reasoning in favour of efforts to consolidate is that having fewer steel producers in China would lead to companies cutting capacity to focus on the most profitable mills. That would push up Chinese steel prices, which are in general considerably lower than elsewhere.

But Mr Wu told the conference that last year, the biggest 10 Chinese steel companies accounted for 34.9 per cent of total Chinese steel output – little changed on 2004 and well short of the 50 per cent figure that Beijing would like to see. Much of China's extra output had been driven by "speculative" investment by smaller companies, he said.

Such data demonstrate that the "commitment by the Chinese government to encourage consolidation is hollow", according to Alan Price, a lawyer at the Washington legal firm Wiley Rein.

The firm specialises in steel trade and advises US steelmakers such as Nucor.

According to Mr Price, net steel exports from China could rise to up to 70m tonnes.

Concerns in the US about Chinese steel trade are shared in Europe, according to Karl Tachelet, director of trade at Eurofer, a Brussels-based body that represents European steel producers.

"It's not the absolute numbers that are disturbing but the scale of the change," said Mr Tachelet.

"In 2006, 5m tonnes of steel from China entered the European Union, and this year the figure could rise to 10-12m tonnes – in which case Chinese steel imports could account for a third of all steel coming into Europe."

Although Mr Tachelet and others are stepping back from saying a crisis is brewing, the trade data from China will be pored over in the steel industry with special intensity in the coming months.