SHANGHAI: China, the world's largest steel producer, may pull back from encouraging steelmakers to get as large as global leader ArcelorMittal, as it directs mills to focus on improving product quality, a government adviser said.

"We want them to focus on upgrading technologies, product quality and the environment issue," said Li Xinchuang, who is helping to develop a new government steel policy as president of the China Metallurgical Industry Planning & Research Institute. "Big is not necessarily good. ArcelorMittal suffered too much last year."

The rethink on the steel policy underscores government efforts to speed closure of obsolete mills and contain what Premier Wen Jiabao said is the "grim" pollution situation. Chinese steelmakers also face rising import competition from Japan, the chairman of the steel association said in October.

"We should try our best to improve our quality to meet market needs," Li, 45, said yesterday in an interview in Beijing. Steel producers need to do better to meet requirements from shipbuilders and automakers, he said.

The plan may be released soon, he said, without giving a specific timeframe. In a November version of the policy draft, the Chinese government was considering asking steelmakers to merge to create one or two producers with annual capacity of 100 million metric tons by 2015.

Luxembourg-based ArcelorMittal made 103.3 million tons of steel in 2008, according to the latest figures from the World Steel Association. Hebei Iron & Steel Group overtook Baosteel Group Corp. as China's largest mill last year, with 40.24 million tons of output, according to research company Custeel.com.

Crisis Performance

The Chinese government may instead encourage steelmakers to get as big as 50 million tons through domestic consolidation, Li said. "During the crisis, the smaller companies performed better than the bigger ones," he said.

ArcelorMittal may have a loss of $389 million last year because of the global recession, according to the median estimate of analysts compiled by Bloomberg. Baoshan Iron & Steel Co., the listed unit of Baosteel, posted a profit of 5.75 billion yuan ($842 million), helped by China's stimulus spending.

Steel product imports jumped 14 percent to 17.6 million tons last year, partly as local producers couldn't meet demand for higher-grade material, Li said. Domestic mills should seek to displace 2 million tons of imports this year, he said.

Chinese steelmakers need to improve production efficiency, Phoenix TV said Jan. 31, citing Li Rongrong, director of State- owned Assets Supervision and Administration Commission. Large Chinese producers, such as Baosteel, use 89 workers to make 10,000 tons of steel, the director said. Rivals in the U.S. and Japan would use 7, the report said.

Baosteel aims to make 44.8 million tons this year, the official Xinhua News Agency reported Jan. 18. China produced a record 568 million tons last year, almost half of global output.

The Environment

Steelmakers would be encouraged "to pay more attention to environmental issues" in the new industry policy, China Metallurgical's Li said.

There would be details on energy savings, carbon and other emission reductions that the government wants to see, he said, without elaborating.

China, the biggest producer of greenhouse gases, in November said it will cut output of carbon dioxide gas per unit of gross domestic product by 40 percent to 45 percent by 2020 from 2005 levels. Carbon emissions from the steel industry will rise without a commitment to reductions from Chinese producers, the European steel industry lobby group Eurofer said Nov. 26.

Another part of the policy is to continue to encourage steelmakers to secure supplies of iron ore and coking coal, used to make steel, by buying assets overseas, Li said.