Nov. 19 (Bloomberg) -- Steel production in China, the world’s largest maker and consumer, may outpace demand growth this year, spurring exports in the last two months, the China Iron & Steel Association said.

Output may rise to a higher-than-expected 565 million metric tons, and demand may gain 18 percent to 549 million tons, Vice Chairman Luo Bingsheng said today in Beijing. The association on Nov. 3 said production may expand 10 percent to 550 million tons this year.

Luo’s comments underscore growing concerns that rising Chinese supply will depress prices and spur exports that will compete with regional mills including Nippon Steel Corp. Baoshan Iron & Steel Co., China’s largest steelmaker, this month said falling prices will affect fourth-quarter profit and it plans to curb output through annual maintenance.

“Chinese steel exports will surge in November and December, partly driven by demand from emerging countries such as Vietnam,” said Zhou Xizeng, an analyst at Citic Securities Co. A price decline in China is spurring exports to other countries where prices remained “fairly stable,” he also said.

Chinese steel prices have dropped 18 percent from a 10- month high on Aug. 4 as mills compete to benefit from the nation’s $586 billion stimulus spending. Domestic hot-rolled coil prices in the European Union were little changed between August and November, according to Metal Bulletin data.

Falling Steel Prices

“The steel overcapacity, leading to rising inventories, may add to the risks of falling steel prices toward the end of this year,” the association’s Luo said at a conference. Demand will rise “steadily in 2010 on expectations of a better economic environment,” Luo also said.

China could have net crude steel exports of 1.2 million tons for the year, after being a net importer of 393,400 tons in the first 10 months, Luo said. The steel association represents major mills in China. The nation accounts for about half of the world’s production of steel.

Rising exports may escalate trade tensions with the U.S., which this year imposed antidumping duties on some Chinese steel products. U.S. levies of as much as 99 percent on $3.2 billion of exports are unfair, the Chinese Commerce Ministry said Nov. 6.

Steel prices may stay low through the first quarter of 2010, Yang Siming, chairman of Nanjing Iron & Steel United Co., said at the conference. Mills are storing products in warehouses because of “severe” oversupply, he said.

Nanjing Steel United controls Shanghai-listed Nanjing Iron & Steel Co.

Iron Ore Imports

Iron ore imports by China, the world’s largest consumer of the steelmaking ingredient, have exceeded demand by 63 million tons in the first 10 months, the association’s Luo also said. Inventories at ports are in excess of 70 million tons, he said.

Luo in October said imports exceeded demand by 50 million tons. Cash iron ore prices to China have surged to more than $100 a ton this month after India suspended some mines for the violation of environmental rules.

Luo’s comments may preface attempts by China to bargain for lower contract iron ore prices for next year in talks with Vale SA, BHP Billiton Ltd. and Rio Tinto Group. The three miners account for three-quarters of global trade.

Prices may rise 14 percent next year to the second-highest on record, according to a Bloomberg survey of analysts.

“Half of the (Chinese) steelmakers have no profit but pricing power is in the hands of suppliers, so next year iron ore prices will rise, but not by much,” Nanjing’s Yang said. Yang predicts a price gain of 5 percent to 10 percent.

Record Demand

Brazil’s Vale expects to export 140 million tons of iron ore to China this year, and has already shipped 108 million tons in the first 9 months, China’s National Development and Reform Commission said today on its Web site, citing a Vale executive.

Iron ore output in China may jump 4.4 percent to a record 860 million tons this year from 824 million tons last year, Lei Pingxi, general secretary of the China Metallurgical Mining Enterprise Association, said at the same conference.

The Asian nation has invested in excess of 60 billion yuan ($8.8 billion) in more than 40 iron ore mining projects in the first nine months, Lei said. The projects would add 350 million tons of capacity in 5 years, he said.

“The chances of 2010 contract prices to rise is 100 percent,” Lei said. “If China does well in negotiations, it would be less than 10 percent. If the situation gets out of hand, it would be higher than 10 percent.”

--Helen Yuan and Xiao Yu. Editors: Tan Hwee Ann, Matthew Oakley

To contact the Bloomberg News Staff on this story: Helen Yuan in Shanghai at hyuan@bloomberg.net

Last Updated: November 19, 2009 05:00 EST