SLASHING China’s excess steel capacity will be a top priority for the government over the next five years and the government is looking at establishing a fund linked to this target, the Xinhua news agency said yesterday, citing an industry association.

    There were no details on the planned fund, said Xinhua’s report, which cited the China Iron and Steel Association (CISA).

    But a trader said it might be for the benefit of banks exposed to the steel sector.

    “It may be used as compensation for banks. A lot of steel companies are going bankrupt so that leads to a lot of bad loans for banks,” a Shanghai-based trader said.

    China’s steel demand continued to shrink this year after falling in 2014 for the first time in more than three decades, pushing many producers to losses and forcing them to either curb production or shut for good.

    The CISA said “the steel industry will be chief among a number of sectors that will have to slash production amid weak demand in the coming years,” according to Xinhua.

    More than 50 million tons of steel capacity have shut in China this year, including both State-owned and private steelmakers, according to industry consultancy CRU.

    CRU analyst Kevin Bai, who estimates China’s overcapacity at around 200 million tons, expects capacity utilization in the domestic steel industry to improve to 80-82 percent by 2022 from about 73 percent currently.

    “That’s a very bullish view,” said Bai.

    China’s crude steel output fell 2.2 percent to 675 million tons in January-October. Of the total output, only 87.5 percent were consumed during that period, according to Xinhua.

    (SD-Agencies)