Shanghai: Steel production growth in China, the world’s largest maker, may slow for the rest of the year as tightening credit could restrain building expenditure, the China Iron and Steel Association said.

Challenges ahead: A worker in a Chinese steel mill. China Iron and Steel Association’s Li Shijun says overcapacity is the dominant issue for the industry, which has been told to put expansion plans on hold. Eugene Hoshiko/AP

Crude steel output in China jumped 13% in July to a record as the nation’s $586 billion (Rs28.8 trillion) stimulus package spurred demand from builders and car makers. The nation’s benchmark stock index has dropped 22% from its 4 August high on concern that banks may tighten credit after extending $1.1 trillion of loans in the first six months.

“The slowdown in bank loans will affect every industry, both steelmakers and consumers," Li said. “It will curb demand. In the first half, the monetary policy wasn’t moderately loose, it was extremely loose."

Urban fixed asset investment for the seven months to 31 July climbed 32.9% in China, the statistics bureau said last month. That’s less than the 33.6% gain through June and the 34% median estimate of 22 economists.

“Steel output would be annualized at 540 million tonnes (mt) for 2009 based on the average January-to-July production," Li said. China produced 500.5mt last year, more than the combined output of Japan, the US, Russia and India, the next four biggest makers, according to the World Steel Association.

In the first seven months, China accounted for almost half of the global output.

China’s cabinet said on 26 August it’s studying curbs on overcapacity in industries including steel.

Industry minister Li Yizhong last month said steelmakers should refrain from expansion because of excess capacity.

Overcapacity is the dominant issue for China’s steel industry, the steel association’s Li said on Wednesday.

“Steel consumption in the second half may be supported by non-government asset investments and property demand, offsetting any slowdown in government expenditure," Li said. “Exports may recover also," he addded.

Stainless steel output may exceed 7mt this year, after reaching 4.06mt in the first half, Li Cheng, executive president of the stainless steel council of China’s Special Steel Enterprises Association, said at the same conference. China has the capacity to make 13mt of stainless steel a year, or about one-third of global capacity, he said.

Baoshan Iron and Steel Co. Ltd, China’s second biggest producer after Shanxi Taigang Stainless Steel Co. Ltd, plans to raise production of the rust-proof metal moderately in the second half, vice-president Chen Ying said on 31 August.