The latest story on softening of Chinese economy is making rounds. GDP in Q2 at 7.6% is down from 8.1% in Q1 and lower than 8.2% projected for 2012. Industrial production in May at 9.6% is substantially lower than average 13% observed in past few quarters. Export growth has come down to 6% to limit current account surplus to a positive 196.1 billion dollars, much lower compared with what was experienced earlier. To revitalise the economy, China had approved a stimulus measure of $4 trillion during 2009-2012 and infusion of $12 billion in Chinese banks to facilitate liberal credits to various sectors of the economy. These are measures fuelling the massive investment flows to the Chinese economy creating capacities much beyond the indigenous absorption capacities. Emergence of China as a major exporter in a variety of commodities including steel was an inevitable phenomenon of this process.
Real estate growth, which in the past was a primary factor in promoting steel consumption, has stalled due to poor demand from the users on account of high prices fixed for houses. Inequality of income and opportunities have risen which has further brought down household demand. Small and medium enterprises have taken bank credit without creating a channel for repayment. Cutting the interest rates twice within June by 0.56%, China is trying to boost the sagging demand to consume a part of the current production and dispose the inventory.
It is envisaged that Chinese steel consumption would reach the peak by 2018 at 788 million tonnes before flattening out from the current level of 624 million tonnes. Most importantly, China is likely to encourage first, second and third line industries that comprise of light and service industries with much less steel intensity compared with heavy machineries.
The implicit reliance on light industries and an urge to enter the next phase of industrialisation would have a negative impact on the volume of steel required for the changeover. Chinese steel industry is currently seized with sustaining profitability in view of the rising cost of labour (increasing wage cost with higher urbanisation) as well as of iron ore and coking coal with declining trend in finished product prices.
For August, China is expecting an average price of HR Coils at $585/t fob which is lower than $630/t fob ruling in May?12. China has taken a strong position on export of rare earths, molybdenum and a few other raw materials thereby risking trade disputes with USA, Europe and Japan.
The uncertainty in the global steel market is likely to be compounded by imminent changes in China.
The author is DG, Institute of Steel Growth and Development. The views expressed are personal