The domestic steel market of China has been growing by 4.1% in 2017, 7.9% in 2018 and is likely to grow by 6.8% in 2019.
Chinese economic growth in the last two decades has been spectacular and also enigmatic. In almost all characteristics of modern development, be it in innovation, science and technology, entrepreneurship, capacity building, income growth, poverty alleviation, the country has reached the top spot surpassing the advanced economies.
The global trend of growth in industry and service sectors is predominantly influenced by Chinese activities. While Chinese rise as a super economic power has become a factor of envy, it is also seen to expand its hegemony over less-developed countries in Africa, Central Europe, South East Asia by undertaking massive investment and building infrastructure in those regions. The BRI across various countries continues to be a classic initiative unparalleled in erstwhile global economic development.
The capacity building by China in various industrial product categories has impacted the demand, supply and trading of commodities leading to acrimonious debate on restricting Chinese access to different countries, these being cheaper to the extent of causing injury to the domestic players.
If China reduces imports of iron ore and coking coal, the global prices immediately shot up. The sustainability of iron ore (62% Fe) prices at $85/dmt CFR China and the coking coal (primary low volatile) price $ 133/t FOB Australia at these levels largely depend on maintaining the current pattern of Chinese purchase. A time has come when China starts believing against distorting the global prices by trading cheaply based on a lower cost of production (low labour cost, availability of subsidised inputs and low capex cost). As costs of these factors of production move up and China gradually moves on to a market economy by cutting down subsidies, the immediate impact is felt by rising costs and prices.
The marginal cost of HRC in China has moved up from $ 400/t in July’19 to $430/t in November’19. China in the past has faced maximum trade actions in the form of anti-dumping duties, CVD and safeguard duties, which have severely restricted its market access to the US, the EU, Southeast Asia, including India, in products like HRC, CRC, corrosion-resistant steel, plate, welded tube, rebar, CRSS, HRSS, SS pipes etc. Chinese steel exports from the peak of 115 MT have already come down to an estimated level of 55 MT in the current year. Simultaneously China has realised the values of sustainable growth and lowering of carbon emission for a green economy and the country’s commitment in bringing down carbon footprint. Thus there are stiff regulations on closing down polluting industries or shifting to other regions at spaces earmarked or in the coastal regions. Applying to steel, already around 200 MT of IF capacities have been eliminated. For other routes, some steel-making capacities are being closed and some fresh capacities are being installed to make high value items resulting in a limited net addition to capacities. This has been happening in 2017-2018 and continuing in the current year. There is a distinct trend in China towards consolidating capacities of two or three units and make a conglomerate of 60-70 MT capacities (like Baowu, Anben, Hebei etc.).
Chinese steel prices are rising. HRC prices, ruling at $427/t (SS 400 grade) in October’19, are currently offered at $ 455/t ex-Tianjin. This exceeds CIS prices by $80/t, Turkish prices by $15/t and Brazil prices by $ 37/t. Chinese export destinations in SE Asia has already been flooded with cheaper exports of HRC from Vietnam. It is also reported that rising domestic steel prices (domestic HRC ex-stock Shanghai at $ 519/t) in China are prompting Chinese traders to import low priced HRC from other locations.
The domestic steel market of China has been growing by 4.1% in 2017, 7.9% in 2018 and is likely to grow by 6.8% in 2019. This may be compared with Crude steel production growth of 3.0% in 2017, 11.1% in 2018 and 7.7% in 2019, which implies a marginal rise in inventories after taking into account the dwindling rate of export growth. Thus sustainability and expansion of Chinese domestic steel market (property market and infrastructure building in land locked regions are two major areas) would drive the Chinese journey and pull up the global trade growth. The Gross Fixed Capital Formation (GFCF) in China at the current rate of 41.8% of GDP is still highest in the world and infrastructure capital formation out of this stands at 19%, which is still at a record level among all developing and developed economies. For comparison, India’s GFCF is around 30% of GDP and Infra share of capital formation is at 6-7% of GDP.
China has a capacity of around 260 MT in Rebar to meet the increasing need of the property market and other infrastructure needs. Its HR capacity at 324 MT may be enhanced further by the new additions in special grade flat products. China is investing billions of dollars for capacity additions in value added products in the next 2-3 years.
A kind of churning process is under way in China. It is trying hard to postpone the inevitable-a drop in Crude steel production and domestic steel consumption. The latter is still rising as China concentrates on balanced regional growth to bring down social tension and thereby perpetuate the current regime. The task is onerous but sounds good for the stability in the global steel industry.
The writer is DG, Institute of Steel Development & Growth
(Views expressed are personal)