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China is set to strengthen its grip on the global steel market as its economy recovers from the coronavirus pandemic faster than rivals and domestic mills expand into higher-quality products, according to Japan’s top producer.

“Chinese steel-makers are working hard on product development,” Katsuhiro Miyamoto, executive vice president of Nippon Steel Corp., said in an interview. “We must stay ahead of them.”

Steel-makers in Japan have focused on making high-end steel used by auto customers, rather than trying to match China — the top producer — in volume. But now they are facing increased competition on quality as well as price as Chinese mills seek to catch up on technology.

Toyota Motor Corp. will buy some steel used in electric vehicles and hybrids from China Baowu Steel Group, seen as the first time a Japanese automaker has adopted China-made electrical steel in its home market, the Nikkei newspaper reported last month.

Chinese mills, which benefit from robust local demand backed by infrastructure spending, are able to reap earnings and to allocate more money to developing new products, Nippon Steel’s Miyamoto said. The country’s drive to create global steel giants through mergers is also making mills more competitive by streamlining operations and sharing technology, he said.

China churned out record volumes of steel last month, extending a robust performance as the strength of the economic recovery boosts demand. While Chinese rivals continue to expand, Nippon Steel and its domestic peers are scaling back operations as the pandemic hits demand.

President Eiji Hashimoto said in June Japan’s crude output could fall below 80 million tons this fiscal year, less than what China makes a month. Japan is now the third-biggest steel-maker after being displaced from second place by India in recent years.

Even so, the worst time may be over as virus-hit demand is in gradual recovery. Miyamoto said output at Nippon Steel may increase more than anticipated toward the end of fiscal year led by a pick up in the auto industry. Nippon Steel has projected that second-half crude steel output will increase by 2 million tons, or 13 percent, compared with the first six months through September.

Nippon Steel will monitor demand from auto customers and resume operations at some of its idled blast furnaces when necessary, Miyamoto said. Its domestic rival JFE Holdings Inc. said this month it’s considering resuming operations at a blast furnace in western Japan, citing a recovery in demand.

Nippon Steel gained 2.3 percent in Tokyo trading on Friday, paring its decline this year to 36 percent.

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