china and iron ore, page-36

Steel: Focus On Market Consolidation (7/2008)


The heat is on in China. Burning furnaces turn iron ore and scrap into the building blocks of modern China: steel. Steel rods and bars are converted into the gleaming tall faces of the urban Middle Kingdom, beams grow into a network of highways, and steel sheets form the cars that travel these roads.

During the past eight years, China has evolved into the world’s largest producer of steel. In 2007, China contributed to 36 % of total global steel output. The growth rate of China’s steel production dwarfs the global average of 5.7 % by far. During the past five years, China’s crude steel output has grown an average of 22 % annually.

However, hand in hand with the impressive growth comes struggle with overheating and overcapacity. Government measures to dampen the potential effects of an overheating economy have started to put downward pressure on steel demand, and the rapid build up of production capacity is therefore leading to overcapacity. Adding the prospects of slowing economic growth to the scenario, these problems are likely to grow larger.

To address overcapacity and to create a more efficient steel industry, the government is undertaking significant efforts to restructure the steel industry. The most important step is internal consolidation of the steel industry, that includes eliminating smaller, inefficient steel mills and concentrating on the growth of larger state-owned companies. Progress is slow, albeit detectable. In 2007, more than 50 % of all steel products came from the 20 largest producers, an improvement from 2006 when the same figure was under 50 %.

The second issue in restructuring the steel industry is an upgrade in the quality of Chinese steel products. In the past China’s steel has received complaints of being primarily commodity-grade. To be able to compete on a global basis, Chinese steel companies must upgrade their product quality to world-class levels. The country’s steelmakers are hungry learners, and the foreign-owned companies operating in China often serve as teachers through their Joint Ventures (JVs) with Chinese partners.

Environmental aspects of steel production have also lately become part of the debate in China. As much of the basic steel production has moved from developed countries to China, China has become a steel mill for the rest of the world. This is a part the country is reluctant to play, faced with indirect costs in form of environmental pollution. Therefore, the government is keen to minimize pollution and to promote sustainable use of land and water resources in steel production.

With some progress being underway both through legislation and organizational restructuring, the year of 2008 could become a milestone in the steel industry.

Growth in China’s steel sector is likely to slow down together with the overall cooling of the economy. Rising raw material prices and the growing difficulty to find cheap labor will also help to calm down growth in investments. However, steel demand in China has not yet peaked as infrastructure construction and other key industries using steel as an input continue to expand.