(Agencies)
Updated: 2008-02-01 16:41

China's steel and smelting industries are starting to suffer substantial production problems as a result of the energy shortages and transport delays caused by severe winter weather.

The China Iron and Steel Association warned on January 30 that several of the country's largest steel mills were rapidly running out of coal and coke coal supplies, which could lead to large cuts in production.

Several industry analysts said that large steelmakers were already being forced to reduce production. Steel Business Briefing, a consultancy, said that nine of the largest companies had cut back, while another consultancy, Mysteel, said China could lose 500,000 tonnes of production of hot-rolled steel as a result. China is the largest producer and consumer of steel.

"The mills that have not been affected by power shortages say they have been hit by raw material shortages," said Ayesha de Kretser, at Steel Business Briefing in Shanghai. "This will make a big dent on China's industrial production for the month as capacity could be down quite a lot and price will likely rise too."

Unusually fierce winter weather in central and southern China - the worst in 50 years - has disrupted the transportation of key goods such as coal and has affected power supplies in many cities, ahead of next week's Lunar New Year holiday.

With further bad weather predicted for the rest of the week, many more companies could be forced into reducing production earlier than scheduled. However, Shanghai-based Baosteel, the country's largest steelmaker, said it had been unaffected.

"The steel factories are large power consumers, so when it comes to reducing power usage they are inevitably top of the local government list for restrictions," said Xu Xiangchun, research director at Lange Steel Information in Beijing. However, he said the crisis could accelerate industry consolidation by forcing small producers out of business.

Aluminium and other metal smelting industries are also facing substantial short-term production problems because of the weather. In the southwestern province of Guizhou, for instance, almost all the 700,000-800,000 tonnes of aluminium capacity has already had to close down because of snow damage to the power network.

In London, the benchmark three-month aluminium price saw its largest one-day gain for 20 years on Tuesday, and has risen by 10.7 percent over the past week.

"Aluminium, being the most power-intensive metal to produce, has been the first to become affected but Chinese lead and zinc production is vulnerable if the coal shortages are an indication of the start of scarce power in China," said Robin Bhar of UBS.

In Hunan Province, which accounts for about one-fifth of China's capacity both for zinc and for lead smelting, electricity supplies are being diverted from industrial to domestic consumers.

LME lead and zinc prices have reacted, gaining 9.6 percent and 5.9 percent respectively over the past week.

Several car factories have also been forced to close or scale back activity. Ford and Mazda closed their plants from Monday in Nanjing, the city in eastern China which has been one of the worst affected by snow, as did Nanjing Auto. Nissan, Honda and Toyota have all been forced to close at least one of their plants in China at times this week, while General Motors cancelled some shifts because of shortages of components.