The steel industry has something to cheer about as China’s steel output has not really fallen as much as predicted. In fact, there are signs of the same rising now. This good piece of news has two major issues associated with it.
One, a recovery to growth in steel production in China may mean an improvement in demand for steel in the country. This logic may be extended to make one take note of the possibility of a turnaround in the economy and industrial production in particular. However, most observations about the country at this stage do not point to any such development. There have been reports of growing unemployment, and factory closures resulting from sharply reduced export orders and domestic consumption. The Chinese new industrial capacities face a serious threat if the exports do not reach the targets as these capacities were planned on an assumed high rate of growth in exports. If the country has now so much of an excess industrial capacity, how can one think of fresh capacities to be built up in such a difficult period of time? It is highly unlikely that steel demand could have grown in the country to give a boost to its steel industry to raise production.
The Chinese government has done many things, which have set a trend for others to copy too. It is providing discounts to consumers who buy household products and appliances. The discounts, it appears, have been taken care of by the government. The government in Italy is also doing something like this to boost the country’s fragile passenger car industry. But, the growth engines of China, the massive housing, industrial capacity building and infrastructure construction are not going to be revived by sales of a few millions of appliances. The exports are crucial, which only can support domestic consumption growth.
This negative view leads me to the second problem. If there is no Chinese steel consumption demand growth, any rise in steel production will have to be for the export market. This is precisely where the problems are for steel makers outside of China.
A rise in steel exports from the country will hit the steel makers in Asia in the first place, then in the EU and the US. How much will the respective nations succeed in protecting their own industries from the onslaught of Chinese exports will not be easy to assess at this point. Protectionist measures, wherever they are in, have been opposed. Even the “Buy American” ideas may not be in place as proposed. Many of the export dependent steel user industries around the world would not like to forego cheaper steel opportunities. Also, lower steel costs and the overall deflationary conditions in the world market will help the Chinese industrial sector to reduce costs and remain more competitive than their competitors in the market for steel intensive products. Indirectly, they will take away a chunk of steel sales potential from the steel makers outside of China.
Also, as China increases its steel output, it will help raise the iron ore prices, which many others in these depressed conditions will not like.
But, if the Chinese steel revival is true, the pure shipment of iron ore and other raw materials will give a boost to the currently sunk shipping industry.
Although there are some discrete signs of a revival of the Chinese steel industry, one will have to wait a while before jumping to a conclusion.
?The author is independent strategy consultant, Steel and Natural Resources and the views expressed are personal