The European Union has told China that it will face a growing threat of trade penalties unless it curbs breakneck capacity expansion in steel and shipbuilding, EU diplomats said on Tuesday. The diplomats said EU Industry Commissioner Guenter Verheugen had delivered the warning during a round of high-level meetings in Beijing. They said feelings were running high over the two sectors because steel was an important industry in nearly all of the EU's 27 member states and because the EU's own shipbuilding industry had just been through a painful round of consolidation. An EU spokesman in Beijing, Michael Jennings, said later that Verheugen strongly distanced himself from any suggestion that the EU was close to initiating any measures on steel or shipbuilding.