For the last few decades USA has been dominating the market economies of the world. This role is currently shifted to China, balancing the world economy as a major commodity producer and emerging as a major consumer of a variety of goods and services. Chinese demand remains a deciding factor in prices of a large number of goods, both raw materials, intermediates and the finished goods. China has experienced an average growth in GDP for the last five years. Investment as a percentage of GDP measured by fixed asset investment has been hovering around 48-50% supported by high domestic saving of around 50% of GDP.
Massive stimulus programme amounting to $ 570 billion in 2009 for the next 3 years encouraged the municipalities to boost land sales and facilitate large borrowings from government banks. At present, the government has perceived that indigenous demand limitations and recessionary trend in developed countries hindering export opportunities may result in excess capacity in various products and this would necessitate a slowdown in economic growth as the current scenario is envisaged to persist.
This would require a major change in the macro structure of the economy in the form of consumption (government and private) taking a lead over investment over a period of next few years. For steel industry in China it has huge implication. Steel intensity in consumption being much lower than steel intensity in investment, the shift from investment orientation to consumption based development implies that China would pursue a process of development that has a built-in mechanism of lower requirement for commodities particularly metals, cement, machinery, electrical and transport equipment required for infrastructure sector and a higher demand for white goods, light weight vehicles, housing, household goods.
For global steel industry this development in China has a far reaching influence. Drop in Chinese steel production with lower demand for iron ore and coal would lead to lowering of prices for these items as China accounts for more than 45% of world steel production. All associated industries like machinery and equipments, electrical and other processing equipments and instruments would face a lower demand scenario. Existing steel producers may enjoy a brief period of higher margin due to drop in production cost, but over a longer period, it would be neutralised by finished product prices.
The shift in macro structure in Chinese economy may not be rapid and may take a few years before implementing the shift. It may so happen that share of consumption in China at the current level of 48% of GDP may be targeted to reach a few notches more in the next five years. This would not significantly reduce the share of investment in the economy and may still leave China with a market share to dominate and influence the global steel industry.
The author is DG, Institute of Steel Growth and Development. The views expressed are personal