The relentless rapid economic development in China is a well-documented story. Nevertheless, what has been less understood, until recently, is the explosive impact of this growth on metal and mineral demand. One such industry that is experiencing the full impact and which has yet to come to grips with the changing landscape is the steel industry. By taking a closer look at the 'China Factor' and its immediate and longer-term impact on the industry, one can better gauge the effect and impact, beneficial or otherwise, on local steel producers and downstream manufacturers.
Part 4 : The 'China Factor' - Her Role in the Changing Landscape of the Global Steel Industry
Part 1 of i Capital examined (A) Driver of Production and Consumption and (B) Causes of Raw Material Shortages. Under (B), it reviewed (i) Iron ore, (ii) Coking coal and coke and (iii) Steel scrap. Section (C) focused on the issue of "China - Net Importer or Exporter?". As part of this, we reviewed the role of steel inventories in Part 3. In this Part 4, we explore the impact of China either as an importer or exporter on the global steel industry.
(C) China - Net Importer or Exporter?"/continued
Looking at the longer-term supply situation, although domestic steel production grew 24% during the first quarter of 2005, fixed asset investment in China's steel sector tumbled - an early sign of the government's macro economic control working through the system. Among the methods implemented were the tightening of credit requirements for steel projects, the stopping of approvals for new construction projects by steel millers, the abolishment of tax rebates for imports of equipment for construction of unapproved steel projects, the abolishment of price discounts on electricity consumption and the raising of entry threshold requirements. The 1.4% drop from the same period last year may appear minute but when compared with the staggering growth of 106.4% recorded in the previous year, it is a massive step in dousing one of the nation's most overheated industrial sectors.
Notwithstanding these, China is already embarking on its new industrial policy to regulate the fast-expanding steel sector. At present, 264 out of the 870 iron and steel manufacturing enterprises are steel-producing entities, among which only 15 have an annual output exceeding 5 mln MT. Shanghai Baosteel Group Corporation, the country's largest producer, has an annual output of not more than 21.41 mln MT, which pales in comparison with the country's total expected output of 350 mln MT. As of last year, the production concentration of the 15 leading steel producers was only 45%, while that of the 10 leading producers was only 35%. The low concentration of the industry has led to disorderly cut-throat competition, resulting in sharp fluctuations of steel prices, as well as undermining the industry's negotiating power in purchasing key raw materials.
As such, China's long-term development policy is both timely and beneficial as it aims to increase the concentration of steel production in large state-owned steel makers such as Baosteel and upgrade the industry through new technologies and improvements in production efficiency. Over the next 15 years, the policy aims to create 2 leading steel makers, each with an annual capacity of 30 mln MT, and raise the combined top 10 steel makers' production to more than 50% of the country's total by 2010 and 70% by 2020. It also intends to limit exports of low-value products such as coke, ferro-alloys, pig iron, steel scrap and steel billets by lowering or abolishing export tax rebates. As a prelude, the Chinese government has lowered the export drawback for steel products to 11% from 13% as of May 2005 - a move that followed the elimination of export rebates for billets in the previous month. The effect has already been felt as the country's billet exports dropped by 660,000 MT in Apr 2005, representing a 40% fall from Mar. In fact, volume of billet exports has been on a downward trend ever since (see figure 1).
Figure 1: Exports of steel billets
By Jul, China has turned into a net importer of steel products, reversing 10 straight months as a net exporter (see figure 2). Going forward, a total removal of export rebates is on the cards but a specific timetable has yet to be announced.
Figure 2: Net Steel Imports/(Exports)
More importantly, the policy has set new requirements for steel makers in different areas such as the scale of production and efficiency, technical expertise, energy consumption and environmental protection performance. There will also be market measures in place, such as tax rebates to promote the production of high value-added steel products. This will help create an orderly expansion of capacity while at the same time, raise the efficiency and technical ability of the steel mills. For instance, steel makers that produced more than 5 mln MT of crude steel as of 2003 have to seek the approval of the National Development and Reform Commission (NDRC) for their future development plans while those that intend to invest abroad, approval from NRDC is compulsory. When these measures are implemented, it will result in either the closing down of many medium and small-sized steel companies or the acceleration of merger and acquisition activities by larger steel players. With this, the aim of establishing 5 large steel makers, each dominating their respective regions, may take place sooner than later. The unofficially mooted five are Liaoning-based Anshan Iron and Steel Group (Angang) in northeast China, Hubei-based Wuhan Iron and Steel Group (Wugang) in central China, Shanghai-based Baosteel in the east, Hebei-based Shougang Corporation in the north and Sichuan-based Panzhihua Iron and Steel Group in southwest China.
All in all, with the Chinese government unrelenting in its drive to curb excessive investments and focus on restructuring its domestic steel industry, fears of China being a runaway train flooding the global market with cheap, low-grade steel and depressing global steel prices may seem too pessimistic. What is more likely over the longer term is the realisation of its primary goal of being self-sufficient. As it continues to restructure and evolve, how will the 'China Factor' impact the local steel producers and downstream manufacturers?