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The Globe and Mail

China makes pessimistic steel production forecast

China has forecasted its steel production will slow in the second half of the year after a strong first half, running counter to the bullish view of the world's largest iron ore miners which expect firm demand for the steel making commodity.

The forecast by the official China Iron and Steel Association emphasises the impact that tight monetary policy is having on commodities demand in the world's second-largest economy. Chinese steel demand is crucial to the price of iron ore and the profits of miners such as Vale of Brazil and London-listed Rio Tinto and BHP Billiton.

The country's steel and iron demand has been robust to date this year, and the pessimistic forecast by Beijing goes against the view of the mining industry.

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"Steel production growth will slow down further in the second half of this year," said Zhang Changfu, vice-chairman of the association, in prepared remarks on Tuesday.

The annual meeting of the CISA used to shape the outlook for the steel and iron ore sector as the association played a prominent role in the annual iron ore price negotiations with the big miners. But the collapse of the system of annual contracts, secretive negotiations in March 2010, and the ascent of a fresh system of quarterly contracts linked to the transparent spot market, have undermined its influence.

Mr. Zhang attributed the slowdown to lacklustre steel exports and to slackening automotive, shipbuilding and machinery industries in China. However, steel demand by China's construction sector would remain "vigorous", he added, citing Beijing's social housing projects and large-scale irrigation projects as boosters for steel demand.

Iron ore mining executives and investment bank analysts are more optimistic, anticipating strong steel demand in China this year, as huge social housing construction offsets any dent in demand by other sectors.

Iron ore prices are this year on course to record their highest annual average level. On Tuesday the benchmark iron ore price - with 62 per cent of iron content - rose to $179 a tonne, up 3.5 per cent from January. Vale recently said it expected iron ore prices to remain at about $150 a tonne for at least five years.

Beijing's battle against inflation, running at a three-year high, was a question mark over China's steel demand, analysts and executives said. China has raised interest rates four times during the past year to try to rein in inflation - a policy that has caused manufacturing growth to slow.

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