Brief on China Steel Industry

Posted on 02 March 2009
 

Source: SEAISI
China’s economy and its outlook
China’s economy grew by 9% in 2008. The annual growth rate shrank continuously from 9.9% in the first three quarters to 6.8% in the fourth quarter.  It was the first time that the country’s GDP growth rate fell below a double-digit level since 2003. According to the World Steel Association, major steel demand drivers shrank significantly during the whole year of 2008. Investment in real estate development in urban areas in 2008 grew by 20.9%, down from the growth of 30.2% in 2007. Automobile production grew by 6.5% in 2008, dropping from the growth of 8.5% in 2007. Air conditioner production growth slashed from 17% in 2007 to 4.9% in 2008. However, growth of civil metal-vessels production registered a significant growth of 44.2%, higher than the growth rate of 29.4% in 2007.

Many experts expected a fast recovery in China’s economy. Merril Lynch & Co remarked that China would be the first major economy to recover from the current global meltdown. China’s de-stocking cycle is almost complete, according to BHP Billiton, which means people will come back to the market and start to buy. The World Bank, however, noted that China had made little progress in rebalancing the economy toward consumption and services from industry and investment. Economists’ estimation of China’s GDP growth in 2009 ranged between 5.0% and 8.0%. Bank of China (Hong Kong), Credit Suisse, Merril Lynch and Nomura International forecasted that China’s GDP growth would reach 8% in 2009, while SJS Markets gave the lowest prediction of 6%.  

Steel industry moderated in 2008
China’s steel industry has also been affected by the economic crisis. According to the World Steel Association, apparent crude steel use increased by only 2.9% to 453.63 million tonnes in 2008. Annual crude steel production was estimated at 500.49 million tonnes, a moderate increase of 1.1% y-o-y. In 2008, long steel product’s share of total finished steel production was 45.1%, compared to 47.1% in 2007. Meanwhile, flats accounted for 37% of production, compared to 34.4% in 2007.

Import and export in 2008
China’s import of crude steel and almost all types of steel products registered a negative growth rate. Export of crude steel at 1.26 million tonnes in 2008 was a sharp drop from 6.43 million tonnes in 2007. Export of finished steel products experienced a sharp decline in many product groups due to weakening global demand. However, China has successfully promoted its export of coated steel products with a growth rate of more than 50% y-o-y.

Export of section, bar and wire rod was 3.48 million tonnes (-36%), 7.48 million tonnes (-21%) and 5.08 million tonnes (-22%), respectively. Export of plate dipped slightly by 2.5% to 8.13 million tonnes. Export of hot rolled coil carbon steel slashed by 25% to 10.64 million tonnes. Export of hot rolled stainless steel sheet also declined from 269,000 tonnes in 2007 to 169,000 tonnes in 2008. Surprisingly, it was recorded that China’s export of hot rolled alloy sheet (HS code 7225.20, 7225.30, 7226.91 and 7226.99) surged substantially from 147,000 tonnes in 2007 to 2.45 million tonnes in 2008. Export of hot rolled pickled and oiled sheet increased by 3% to 234,000 tonnes. Export of cold rolled sheet escalated by 9.4% to 3.76 million tonnes. Export of electro-galvanized sheet and tin plate declined by 25% and 17% to 2.78 million tonnes and 122,000 tonnes, respectively. Export of chromium coated sheet surged by five folds to 23,808 tonnes. Export of galvalume coated sheet doubled in volume to 340,000 tonnes. Export of color coated sheet successfully doubled in volume to 2.55 million tonnes. Export of other metal coated sheet, registered a significant increase of more than 50% y-o-y to 91,000 tonnes. Export of pipes and tubes was 9.9 million tonnes in 2008, a surge of 15% y-o-y.

Revitalization plan for the steel industry
On 14 January 2009, China’s State Council announced a plan focusing on economic regeneration of the Chinese steel industry. They are:

  1. Promote steel use in the domestic market, while maintaining a stable share in international market by adopting a moderately flexible taxation policy.
  2. Phase out obsolete facilities to strictly control steel capacity. No new expansion projects should be planned for the purpose of size expansion only.
  3. Facilitate industry restructuring to improve industry concentration ratio.
  4. Promote investment in technical revamping, R&D and importing of advanced technology. A special bill will be budgeted by the central government to support this.
  5. Strengthen control over the activities of iron ore importing and regulate distribution system for steel products to establish a win-win scheme between sellers and buyers.
China has to rely a lot on imported raw materials, such as iron ore. Leading steel companies such as Baosteel and Wuhan Iron and Steel each import about 70% of their iron ore requirements. On 7 January 2009, the Ministry of Land and Resources of China announced a long-term plan for China’s mineral resources. For iron ore, a total of 30 billion tonnes of newly proved reserves is expected for the period 2008-2010 and 60 billion tonnes for 2011-2015. With the increasing reserves, production of iron ore is expected to rise to 940 million tonnes in 2010 and 1.1 billion tonnes in 2015. This would help the industry to be self-sufficient for at least 50% of iron ore.

In fact, China has been looking for more iron ore resources in the past several years to secure sources of supply and in response to soaring iron ore prices. In January 2008, Baosteel signed a 10-year iron ore supply agreement with BHP Billiton with a supply of 10 million tonnes of iron ore annually to Baosteel. Later in the middle of the year, Sinosteel successfully took over Australia’s Midwest. China National Machinery and Equipment Import and Export Corporation (CMEC) also signed an agreement to develop an iron ore project in Africa, which is expected to provide an access to 30 million tonnes of iron ore annually.

China’s government has also announced export tariffs removal effective on 1 December 2008. In addition, the Automatic Export License System for steel products has been abolished from 1 January 2009. This is to ease pressure on exporters. It is predicted that there will be further tax cuts, rebates or exemptions in the future.

China’s steel industry concentration remains low despite a number of mergers and reorganization in 2008. The government’s plan to encourage large domestic steel mills to merge and reorganize will help to improve the degree of concentration. The target is to have the top 10 steel mills with crude steel production accounting for 50% of China’s total production by 2010. The crude steel output from the top 10 steel mills in 2008 accounted for 44% of China’s total, compared to 87% in the case of Korea’s top two mills and Japan’s 74% from its top four mills.


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