Excess production may hit profi t margins. [China Daily]

China's steel output may rise 10 percent this year, aggravating the steel sector's oversupply problems and clouding the 2010 iron ore talks that are ready to kick off soon.

The country's steel lobby, the China Iron & Steel Association (CISA), said yesterday at a media briefing that steel output would rise by 50 million tons to 550 million tons this year.

"Oversupply problems have weighed heavily on steel prices and squeezed profit margins. This could lead to a more difficult situation in the fourth quarter and extend to the next year also," said Luo Bingsheng, CISA vice-chairman.

Luo said the industry's production capacity would rise by 58 million tons this year, from 660 million tons in 2008.

"The oversupply situation will take a long time to sort out, given the fact that some steel mills are expanding capacity in the name of modernization or increasing it without necessary approval," he said.

Steel output rose 7.5 percent to 420 million tons in the first nine months of the year, according to official data.

He admitted that Chinese steel mills are at a disadvantage in annual iron ore negotiations due to their low industry concentration, while the three global iron ore miners are in an advantageous position due to their monopoly.

"There are a few people saying that the iron ore price would increase in the next round of the negotiations, but that is only a reasonable speculation, based on the weak US dollar," he said. "However, the basic fact of iron ore supply outstripping demand is not going to change. There will be little room for prices to rise at next year's talks," he said.

This year's iron ore price negotiations hit a deadlock in June after CISA insisted on a better discount on 2008-09 prices after a 33-percent cut in benchmark iron ore prices had been set with other Asian steel mills.

Chinese steel prices have fallen 20 percent since early August as oversupply weighed on steel prices.

Seventy large- and medium-sized domestic steel enterprises posted a combined net profit of 30 billion yuan ($4.39 billion) in the first nine months of this year, down 78 percent from a year earlier, according to the CISA.

Operating revenue from their core business was nearly 1.56 trillion yuan in the first nine months, down 24.4 percent from a year earlier.

CISA also reported that stockpiles of steel at 26 Chinese cities grew 5.3 million tons to 11.1 million tons in the first nine months.