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Steel making at Wuhan Iron and Steel Group in central China's Hubei province. Steel companies are diversifying into other industries, such as agri-business, as the government slows down infrastructure spending.Reuters/Reuters

You know the Chinese steel industry is heading for a bad year when the country's steel giants start getting into the hog business.

With strict restrictions on property markets and a freeze on high-speed rail construction, the industry is expected to see a big drop in demand this year.

That's why Wuhan Iron and Steel Corp. is moving into non-steel work, such as building hog barns to cash in on the high price of pork amid dwindling returns on its main business.

"The price of one kilogram of steel is cheaper than a quarter of one kilo of pork," Wuhan chairman Deng Qilin, said recently, explaining the company's decision to buy land around the city of Wuhan and use it for green farming and livestock projects.

China's slowing growth and maturing economy are accelerating a problem economists have been warning of for years: Its aging steel industry is inefficient, expensive to run and heavily polluting. Now the production oversupply threatens to become a serious problem for steel makers. After years of government-led investment focused on steel-hungry infrastructure such as railways and buildings, Beijing wants economic growth to stem from household spending.

This, combined with new real-estate regulations aimed at cooling an overheated market, is driving Chinese steel mills into "grave difficulties," Maanshan Iron and Steel Co. chairman Gu Jianguo said.

Wuhan, which has partnerships with two Toronto-based iron ore companies (Adriana Resources and Century Iron Mines ), isn't alone in diversifying. The head of state-owned Baosteel Group Corp. Ltd., Xu Lejiang, said recently that half the company's profits last year came from non-steel activities.

"A significant number of Chinese steel makers are not making money – they're losing money," said Jiming Zou, an analyst with Moody's in Hong Kong.

A report last week from Moody's forecast Chinese growth in steel demand will slow sharply to 5.7 per cent in 2012 – about half the previous three years' average of 11.1 per cent.

The gloomy outlook will be felt in countries such as Canada, whose exports to China of iron ore and coal – the two main components of steel making – were worth about $2.4-billion last year.

"The implication for overseas iron and coal suppliers is they will have to slow down their contracts," said Helen Lau, senior analyst in mining and metals for UOB Kay Hian.

The powerful central government has been calling for state-owned enterprises to consolidate, close some older steel mills and retrofit others to make them less energy-hungry and less polluting. So far those calls have gone unheeded, in part because regional governments depend on the mills as a tax and employment base.

"I don't see a very clear resolution in how these steel mills are tackling the situation. It's a very difficult situation because nobody wants to give up," Moody's Mr. Zou said.

Some believe the next five years will be a turning point for the industry, as economic reality combined with pressure from Beijing forces mills to become more efficient or to close completely.

"I think China will repeat the history of Western Europe in the 1970s," said Xu Zhongbo, a professor in the Metallurgy Institute at Beijing's Science and Technology University. "The Europeans needed 30 years to close [down]40 per cent in capacity … China may need five years. China can do everything quickly – it goes up quickly, and goes down quickly."

"The central government is very powerful," he added. "In five years, China will have closed 200 million tons [in steel capacity]and the environmental situation will be improved."

UOB's Ms. Lau is less optimistic that the industry can make rapid changes, and expects China's peak steel demand from infrastructure may be reached in 2030. "It's not that they will scrap investment altogether … It's just that they want to slow down," she said. "It's really dependent on how effective China is at implementing its new growth strategy."

Special to The Globe and Mail