China's iron and steel industry could be regarded as a barometer of the country's economy, which is still mainly propelled by fixed-asset investment and export-oriented manufacturing that consume a lot of raw materials. Hence strong economic growth boosts demand of steel products.

Therefore it is little no wonder that steel production continues to climb even though the industry has been a major target of the government's two-year-old belt-tightening policy. This strongly suggests that if Beijing cannot rein in the galloping economy, it can hardly cool down the steel industry alone.

The National Development and Reform Commission (NDRC), China's top economic planning body, has repeatedly warned about excessive investment in the steel industry and demanded that local governments reduce their investment and close down small factories with backward technology. However, such warnings and demands have largely been ignored at the localities as the latest statistics show that steel production recorded strong growth in the first half of this year and is expected to increase even faster in the second half because of robust demand at home and for exports.

China's crude-steel output in the January-June period jumped 18.26% from a year ago to reach 199.47 million tonnes, according to statistics released by the semi-governmental China Iron and Steel Association. If the production capacity realized in June continued into the second half, steel output for the whole of this year would reach 424 million tonnes, up 20.45% from last year, the association said.

"The growth is too fast; we should be concerned," Luo Bingsheng, vice chairman of the association, was quoted by the state-run Xinhua News Agency as saying. Luo toed the NDRC's line to say the steel sector's main tasks were still to prevent production capacity growing too fast and speed up restructuring.

But just a week ago, Qi Xiangdong, deputy secretary general of the China Iron and Steel Association, claimed that reports about the steel industry's overcapacity have been exaggerated. "China's production capacity of iron and steel has been overestimated while market demand has been underestimated," Qi told a forum in Beijing on China's macroeconomy.

Qi estimated that domestic demand for steel alone will reach 400 million tonnes this year. And he expected steel exports would also surge because of growing global demand. Qi said the country's macro-control policy should keep domestic steel prices below the international level in the second half of the year, according to Xinhua.

Analysts say that as long as China's economy is driven by investment and exports of mainly manufactured goods, demand for steel products will remain strong despite government's efforts to rein them in.

"Infrastructure and property-development projects, manufacturing export-oriented goods, all need steel products. If market demand remains so strong, how can the government curb it?" an economics researcher in Beijing said. And if the government's macroeconomic control policy failed to slow down gross domestic product (GDP) growth, it would be useless for the NDRC to demand that the steel industry cool down, he added.

Not only has domestic demand increased, China's exports of steel also soared in the first six months of this year. China Customs statistics show that finished-steel exports amounted to 17.09 million tonnes in the first half, up 47.71% year-on-year. China exported 4.43 million tonnes of steel products in June, more than twice the figure for the same month last year. China's imports of steel products, however, tumbled by 28.81% to 9.41 million tonnes in January-June.

With such a strong market, no wonder the NDRC's repeated orders to close down small steel plants have been largely ignored. In mid-July, the NDRC's industrial department admitted in a circular that "to close down furnaces smaller than 300 cubic meters is a heavy task for the local governments ... So the order could hardly be carried out." As a result, the NDRC has had to extend the deadline for the closure of small plants from 2007 to 2010.

However, despite growth in production, the steel association said profits of the steel industry dropped sharply in the first half because of soaring raw-materials costs, such as iron ore, coal and electricity. The country's top 83 steelmakers earned 35.27 billion yuan (US$4.4 billion) in the period, down 30.36% from the same period of last year.

And as steel production soars, China becomes more dependent on imported iron ore, according to the statistics of the steel association, which show the country produced 193.2 million tonnes of iron in the first half of this year. Calculating according to iron content, China's dependence on ore imports reached 53% in January-June period, Xinhua said.

In the first half of this year, large and medium-sized mines produced 245.5 million tonnes of iron ore, an increase of 63.7 million tonnes or 35% year on year. If iron-ore output of local small mines was taken into account, China's total output was about 295 million tonnes during the period.

The statistics from the steel association also show that investment in the steel industry slowed down remarkably in the first half of this year to 13.7% year-on-year. By comparison, growth of investment in the steel industry was as high as 92.6% in 2003 but dropped to 27.5% in the whole of last year.

Analysts say this may have had less to do with the central government's belt-tightening policy as the figures seem to suggest. Instead, it is more of a sign indicating that investment in the steel industry now tends to be saturated so there is not much opportunity for newcomers unless they have huge capital and a sharper competitive edge.

It is probably for this reason that Luo, the vice chairman of the China Iron and Steel Association, urged the government to raise the threshold for foreign investment in the country's steel industry.

Luo said the iron and steel industry was pivotal for the national economy and therefore should not be controlled by foreign capital. He suggested that the threshold for foreign capital access be raised to safeguard the national interest and the industrial interest, according to another Xinhua report.