In June, China produced nearly half of world’s crude steel. Its further rise in steel production or a possible fall is a matter of serious concern to the industry worldwide.
Given the fact that the steel industry in the developed nations is faced with one of the toughest conditions in the recent history and that it has become abundantly clear that production in these nations is not competitive not only for the world market but also for their home markets in the absence of adequate protection especially if the current conditions in the steel market prevail longer, many of them will have to shut shop. The space left vacant will be up for grab and players from the low-cost developing nations will fight for it.
Backed by a strong domestic market and a supportive government, China can fare well in the competition. They will keep their coal and iron ore to the minimum use and buy from the world market. If their purchases raise coal prices, it will hit others more than themselves. The result? Steel makers dependent on the world market for iron ore and coking coal will become weak.
Chinese steel makers backed by their government and the banks have significantly secured their coal and iron ore resources with continuous investment overseas. Over a period of time, their dependence on iron ore and coal oligopolists will be reduced. This will provide them with adequate comfort in respect of raw materials.
The USA can open up its coal resources more and will benefit from the rise in them in the world market. But, the country suffers from an ageing steel industry, a shrinking domestic market and lack of competitive strength overall. Their blast furnace iron making has been substituted significantly by outsourced slabs and DRI and home scrap. So, in a way, they will not be in a position to raise their capacity to take advantage of their coking coal assets.
Europe and Japan will suffer as also Korea. Europe is high cost and is also faced with a shrinkage of the market. Japan has a competitive industry but is ageing. The Japanese trading houses have picked coal and iron ore assets all over the world. But, this does not provide much support to the profitability of steel makers as they buy at global contract prices and slowly are losing their grip over them. The Japanese have the advantage of proximity to the markets in the neighbourhood. Therefore, they may not be as badly placed as the Europeans, but, in comparison to the Chinese, they have reasons to worry.
POSCO or for that matter even the other mills in Korea will also have a headache with the growth of the Chinese mills. There are already two Chinese steel makers today above POSCO in the world list of large steel companies. May be, in a few years, another few will overtake them. This will reduce growth potential and bargaining strength of POSCO. Their venture in India is literally out. They have all the capabilities to grow but not the space for it.
China’s growth story can be upset only if iron ore from India stops reaching them, which itself is not a possibility given the iron ore resources in India, compulsions of the government in the external trade front and the government policy at this stage.
But, what happens if the Chinese steel industry comes under pressure unable to find adequate domestic support due to a weakening of the Chinese economy? Firstly, a Chinese economic slowdown will disturb the global economic recovery, which today lies only at its nascent stage. If Chinese mills move to the export market, steel makers in many countries will be hit more directly, including in India. If, instead, they decide to cut production, the global raw materials industry will see stars. More importantly, the world finance will come under severe pressure.