Steel prices 'won't derail' overcapacity cuts

China's efforts to curb industrial overcapacity will not be derailed by the recent surge in steel prices, an official with the nation's top economic regulator said on Thursday.

"The recent domestic steel price surge does have a certain impact on (our) efforts to curb overcapacity, when some factories have restored or increased output, but the impact remains quite small," said Zhao Chenxin, spokesman for the National Development and Reform Commission.

The composite steel price index released by the China Iron and Steel Association rose to 84.66 by the end of last week, up by 26.2 points, or 44.8 percent, since the beginning of the year.

Zhao said the increase in the price of steel products is mainly driven by seasonal changes in demand, and therefore may not be sustainable.

"The increased output ... is mainly produced to meet seasonally rising demand in the domestic market as new construction projects pick up," Zhao said, adding that the price surge would not worsen overcapacity, since such seasonal demand remains at a low level.

"The government will speed up efforts to help guide those unprofitable mills out of the market," Zhao said, adding that efforts to cut overcapacity will be implemented as soon as local governments finalize and submit capacity reduction plans to the central government.

Huang Yiping, a professor of economics at the China Center for Economic Research, said that the effort won't be fully implemented unless local governments are willing to stop providing assistance to unprofitable companies, including steel makers and coal miners.

Zhang Lin, a senior analyst with dz18.com, a steel supply chain e-commerce platform, said that local governments should treat all types of enterprises equally in the capacity reduction program.

"A lot of private enterprises are making energy-efficient steel products, but they might be forced to shut down as some local governments refuse to target unprofitable State-owned companies," Zhang said.

"If local governments fail to target the appropriate companies, overcapacity that has remained long in China's steel sector will not be changed much, at least in the near future," said Zhang.

China plans to close 500 million metric tons of surplus coal mining capacity and up to 150 million metric tons of crude steel capacity over the next three to five years.