The role of China in shaping the global steel industry is well established. When the going was good till 2008, China’s predominance was a matter of envy. Post-2008 and particularly since 2014 till date, with all that is happening by way of shrinking demand, excess capacities, cheap imports nearly at predatory prices, loss in profitability and employment and shareholders’ reluctance to hold on or acquire fresh stocks, China is once again at the receiving end. The spate of trade-restrictive measures (AD, CVD, safeguard and MIP) adopted by all the major steel-producing nations against China conclusively proves that Chinese exports arising out of surplus capacities at less than fair prices are causing irreparable damages to the domestic industries which are already facing subdued demand, inability to clear huge out standings with the banks and falling EBITDA.
The challenges before the global steel industry are tough as the projection of the global steel market (by WSA) for the current year puts it at (-)0.8% growth and next year, it is pegged at +(0.4)% growth. Against this background, the significance of how the Chinese steel industry behaves in 2016 and 2017 assumes paramount importance.
In the first four months of the current year, China has produced 261 million tonne (mt) of crude steel, down 2.3% from last year. However, its import of iron ore at 412 mt in the first five months has gone up by more than 9% over last year. The current prices at $50.7/t cfr for China for 62% fe ore came down from $64/t cfr China only a month back on dwindling demand from China. With demand from China persistently declining and the ore prices that came down below $35/t cfr five months back, it would have nosedived further with most adverse consequences to the four global miners and all others in the trade including, our own NMDC.
Similar is the case for the prices of coking coal and coke, and the role of China in holding them at reasonably remunerative levels.
It is well known that fixed asset investment (proxy for gross fixed capital formation), especially in infrastructure, has been and would continue to be the major driver of steel demand globally, as it is more steel-intensive (nearly six-seven times more than investment in other segments). China currently spends around 46.4% of its GDP on fixed asset investment.
A massive build-up of funds to provide investment for infrastructure development in the non-coastal areas (as a fresh stimulus) is already underway in China. Residential construction accounting for around 25% of investment is higher this year and housing prices are on the rise. The manufacturing sector that draws around 35% of investment in China is the weak link, as demand for manufactured goods from developed and emerging countries may not be strong enough to sustain the activities.
China has officially announced it would cut down 100-150 mt of crude steel capacity in next five years (2015-20). The achievement so far is below the target per annum, but can be made up later. Its plan to transfer capacities to other countries (10 mt to Brazil, as well as more volumes to other countries) would enable the country to avoid AD and CVD investigations and bring about supply-demand matching. China has exported 46.3 mt of steel in Jan-May 2016, which is 6.4% higher than last year’s level.
It is certain that Chinese export volumes in the current year would come down compared with 112 mt of export last year, with the implementation of AD/CVD/Section 337 trade measures adopted by various trading partners against Chinese exports. In the case of India, the imposition of safeguard duty and MIP has led to lower imports from China in the first five months (351 mt as compared with 397 mt last year).
Although steel consumption in China has been projected to come down by 27 mt in the current year (645 mt) and by 19 mt in 2017(626 mt), the high share of FAI in GDP bodes well for sustenance of domestic demand with minor fluctuations in the short term. Any drastic fall in internal demand in China would result in a volcanic tremor in the current level of steel prices and play spoilsport to all other developmental and planned activities being undertaken by emerging economies, including India.
The author is DG, Institute of Steel Growth and Development. Views expressed are personal.