MAC: Mines and Communities

China's iron-clad conundrum

Published by MAC on 2007-10-23


China has been leading iron and steel demand across the world – but which way might the market soon turn?

Unnamed Chinese “industry analysts” have been cited as claiming that domestic iron and steel production cannot be maintained at its present level, due not only to “limited resource supplies” but also a “deteriorating environmental situation.”

In fact, China’s domestic steel consumption has been slowing over recent years, even as demand has apparently grown. Last year, the country for the first time became an exporter of steel products, while its companies continue avidly to seek new iron ore mines and sites for steel plants, overseas.

Despite this, a recent Financial Times study of global steel markets expresses optimism that China’s own consumption is set to increase - a prospect which obviously comforts global steel manufacturers at large.

[See also: “The Great Steal” in this MAC update.]

China's steel industry cannot sustain expansion due to limited resources and environmental pollution - analysts

Interfax China Metals

19th October 2007

China's steelmaking industry cannot sustain its current expansion in production and exports due to limited resource supplies and a deteriorating environmental situation. However, as a net exporter of steel products, China will continue to supply global demand, and increase the number of overseas steel mills in the future, industry analysts told Interfax Thursday.

"Constructing steel complexes in other developing countries that have both adequate raw material supplies and growing demand will help offset the risk from high iron ore prices, freight rates and product oversupply," Ma Zhongpu, director of the market research center with China Commodity Marketplace said.

Ma also called on the Chinese government to implement favorable policies, set up overseas development funds, and promote consolidation in the domestic steel industry in order to ensure steel groups can compete on the international market for overseas projects. Baoshan Iron and Steel Group's joint project with Brazil-based mining company Companhia Vale do Rio Doce (CVRD) for a 5 million-ton steel slab plant in Brazil is a well-documented example of a Chinese steelmaker successfully setting up a low-cost operation in a growing market.

When reached by Interfax, Laiwu Steel Group's Vice General Manager Zhang Shengsheng said, "Although the domestic demand for steel products is still strong, Laiwu Steel is also looking for opportunities to establish steel mills overseas."

However, Poh Teong Eng, SMBC's first vice president & head of commodity finance, commented, "Only Baosteel is really qualified to set up steelmaking projects overseas at the present, and further upgrade and consolidation projects will be needed before the majority of Chinese steelmakers are ready to look abroad."

China's decreasing steel consumption growth over last few years

Although China has enjoyed rapid economic growth this year, its growth in steel product apparent consumption has been slowing down since 2004. In 2003, growth in apparent consumption stood at 25.75 percent. This fell to 11 percent in 2006 and 10 percent in the first eight months of this year.

China is still undergoing rapid industrialization and urbanization, and this development is driving domestic demand, so it is difficult to determine what constitutes oversupply in terms of steel production in China, Ma said.

The coastal cities in China, mainly Shanghai, Guangzhou and Beijing, have a steel product consumption of about 500 to 600 kilograms per person, which is close to developed countries' maximum levels. However, investment growth in those areas has been in decline since 2004, which is the main reason behind China's slowing steel product demand.

Since this March, China's crude steel output has lingered at around 40 million tons to 42 million tons per month, and it is unlikely that the country's crude steel output will exceed 490 million tons this year, Ma said.

China's steel product exports to slow in future

Chinese steel mills will have to adapt in order to continue to supply global demand, especially in light of raw material supply shortages, and restrictive policies phasing out outdated capacity and controlling exports with taxes.

China's steel product export growth has been in a downward trend in the second half of this year, with net exports in Augusts at 4.46 million tons, lower than the average monthly net exports in the first 8 months, and Ma believes steel product exports will remain at their current level for the rest of the year.

Meanwhile, global steel product demand has been expanding by between 30 million and 40 million tons annually since 2004, with the main increase in demand coming from developing economies such as India, Vietnam and Brazil, as well as potential markets in South America and Africa, Ma said.

China turned from a net steel product importer to exporter in 2006, and supplied as much as 74.85 percent of increased global demand in the first seven months of this year. China is set to continue supplying expanding global demand in the short term, as new overseas capacity is still likely to take 2 to 3 years to come online, he said.

The Chinese government aims to phase out 35 million tons of outdated steelmaking capacity this year, and 55 million tons of outdated capacity over the next 5 years.

The government also levied an export tax of between 5 percent and 10 percent on a total of 83 types of steel products, including wire, hot-rolled plate and steel section, on June 1 this year, following the cancellation of export rebate taxes on the same 83 types of steel product on April 15. In addition, the export tax on steel billet, steel ingot and pig iron was increased from 10 percent to 15 percent on June 1.

When reached by Interfax, Hu Chunli, director of the NDRC's Industrial Development Research Institute, said, "As much as 20 percent of China's energy consumption goes into producing products for export. The Chinese government is determined to curb the excessive export of high energy-consumption and environment polluting products such as steel products. Policies may include further increasing export taxes, export licenses and restrictions on steel product projects."

FT REPORT - STEEL: China keeps the good times rolling

By Peter Marsh, Financial Times

8th October 2007

How long can it last? That is the question facing steelmakers, as they consider the extraordinary demand and profits boom that has transformed the outlook for the industry in the past five years.

Since the main driver of the boom has been China, the answer to the question is highly dependent on the continuing pace of economic growth in the world's most populous country.

There are few signs of demand for steel in China starting to slow.

Indeed, consumption of the metal there seems likely to continue to grow strongly in the next year or so, on the back of factors such as the construction surge for the 2008 Olympics and plans for an increase in Chinese car production.

As a result, most steelmakers are guardedly optimistic about prospects for their sector in the next couple of years.

That is even taking into account the shockwaves that have been sent through the world's financial system in recent weeks as a result of the banking "credit squeeze", linked to the woes of the housing market in the US.

Most people who follow the industry believe there are enough positive factors to offset any potential weaknesses connected to the fallout from the financial turbulence.

One factor that has helped the industry - and which seems likely to have an influence for some time - is the prolonged period of consolidation that has given much more power to producers to keep prices high.

With efforts by steelmakers to merge to form bigger groups still continuing - albeit at a slower pace than a couple of years ago - there are few signs that the main players in the industry are about to relax their grip on product prices.

Since the end of 2001, world steel prices have risen threefold, boosting the sector's profitability. Over this period the global composite stock price index of all quoted steel company shares has outperformed the average stock price of all quoted companies by nearly four times.

One way for this run of good times for the industry to come to an end, so some in the steel industry fear, is for China to turn in the next few years into a large steel exporter. If this were to happen, the subsequent extra supplies of the metal reaching world markets could have a significant effect in pushing down prices.

In 2003 China was a net importer (imports minus exports) of some 35m tonnes of steel. This year, however, China is expected to be a net exporter of some 50m tonnes.

On the assumption that the trend continues, the higher exports from China's steel companies, most of which remain government controlled, could indeed damage the global industry's prospects.

Dan Dimicco, chief executive of Nucor, a large US steelmaker, says exports from China - much of them helped, he says, by government subsidies - could have a "dramatic" impact on the health of the sector.

The optimists in the steel sector, however, play down such worries.

These people believe that neither Beijing nor the executives in charge of China's main steel companies wish the country to become a large exporter of the metal, on the grounds that greater profits are likely to be made through supplying steel to the country's fast growing domestic economy.

A notable adherent of this "no need to worry" school of thought is Lakshmi Mittal, the Indian billionaire who is chief executive and main owner of Arcelor Mittal, the world's biggest steel producer.

The debate about where the steel industry is going will feature in the discussions today and tomorrow at the annual meeting in Berlin of the International Iron and Steel Institute, the main trade body for the industry to which all the world's biggest steel producers belong.

Inevitably, there will be concerns about the impact on the steel industry of any broad economic slowdown that becomes apparent in the next few months.

Bruno Bolfo, chairman of Duferco, a Switzerland-based company that is the world's biggest steel trader, points out that the "steel intensity" of global economic growth - the amount of steel consumed per unit of economic expansion - has increased in the past five years.

This, he says, is because so much of the world's recent economic growth - in both mature and developing economies - has been linked to infrastructure projects such as new ports, railways and power plants.

"These [projects] are much greater consumers of steel than ordinary consumption," says Mr Bolfo. He envisages that finance for infrastructure provision will continue to flow very much as before, so the chances of a downturn in the steel industry as a result of the banking problems are, he believes, slim.

Also positive about the next few years is Alexei Mordashov, chief executive and main owner of Severstal, Russia's biggest steel company. Mr Mordashov - who has in the past few weeks authorised a $10bn investment programme to improve Severstal's plants in Russia, the US, Italy and France - says that his investment project is unlikely to be blown off course by any collapse in steel consumption. "Steel demand around the world is robust," he says.

Between 2002 and last year, the world produced an extra 347m tonnes of steel, a rise of 38 per cent, taking world steel output in 2006 to 1.2bn tonnes. Of this extra production, 245m tonnes - or 71 per cent of the total - came from China.

Most of the higher Chinese production was used locally to feed industries such as construction, engineering and cars, although some was used inside manufactured products that were shipped out of China.

The former communist nations of eastern Europe, Russia and other former members of the Soviet Union, together with Turkey, have contributed about 41m tonnes of the extra steel made between 2002 and 2006, while 25m tonnes have come from the steel plants of Asian countries, excluding the former Soviet Union, China and Japan.

Of the extra 345m tonnes of steel production, only 28m tonnes - 8 per cent - has come from the "mature" economies of North America, Japan and western Europe.

In the next few years, World Steel Dynamics, a US-based consultancy, believes that growth in production and demand in China will continue to outpace by a long way that in other countries.

The consultancy reckons that between 2006 and 2017, global steel demand will grow by an average of 4.5 per cent a year, with annual growth of consumption in China likely to be 6.1 per cent, compared with just 2.9 per cent for everywhere else.

Assuming this forecast comes even close to being met, 2001-17 will turn out to be a growth period for the industry that will rival the 1950-73 post-war boom, when global steel demand rose by an average of 5.8 per cent a year.

That was followed by a long period of stagnation: between 1974 and 2001, global demand for the material rose by a meagre 0.6 per cent a year, with many steel companies hit by extreme overcapacity. The industry was then characterised by weak profits and had stockmarket ratings to match.

The big change in recent years, compared with the 1950-73 boom, has been that the countries sharing in the steel industry's current growth are a far more diverse group than those which featured in the earlier expansion period. The post-war boom in steel demand was almost exclusively confined to western Europe, North America, and Japan.

The much wider reach of the steel industry in terms of geography is also illustrated in the list of companies which are today's most active players in the sector.

Leading the charge over the past few years in terms of mergers and acquisitions has been Luxembourg-based Arcelor Mittal, formed from the €26.9bn takeover last year by Mittal Steel of Arcelor, at that time Europe's biggest steelmaker.

Among the steel companies from outside the most developed regions that seem likely to feature significantly in the industry in the next few years are Tata Steel, JSW and Essar in India.

Tata Steel became the world's fifth largest steelmaker nine months ago as a result of its $12bn takeover of the Anglo-Dutch Corus, which includes the former British Steel.

Severstal and Evraz - Russia's second biggest steel company - both also seem intent on more international acquisitions. Gerdau of Brazil and Ternium of Argentina are emerging as regional South American champions: Gerdau has bought a series of North American businesses, the most recent deal being its $4.2bn purchase in July of US-based Chaparral.

Not to be outdone, representatives of the more mature economies that have been active in steel moves in the past couple of years have included Germany's ThyssenKrupp, which is building a $3.7bn steel plant in the southern US and another in Brazil.

US Steel - the US's biggest steel producer - has sought to join the consolidation efforts in North America, spending a total of $3.2bn on buying two companies - the US steel pipe maker Lone Star, and Stelco, Canada's last independent steel producer.

But the most interesting deal - at least in terms of international involvement - was the $1.35bn purchase of the Sparrows Point steel mill from Arcelor Mittal that was agreed last month by an unusual consortium.

It comprised Esmark, a US investment group, together with Companhia Vale do Rio Doce, a Brazilian mining company, and the Industrial Union of Donbass Corporation, a Ukrainian steel producer.

The US/Brazilian/Ukrainian combination was almost certainly the first time such a joint-venture has come together in any business deal - and underlined the increasingly global nature of the steel industry.

Angling for Iron Ore in China's Streams

PlanetArk CHINA

23rd October 2007

SHANGHAI - It may not have the allure of trout fishing, but Chinese farmers are cashing in on the world metals boom by fishing with magnets for lumps of iron ore in local streams.

"It sounds unbelievable, but it really happens in many mining areas, including mine," a manager of a mine in the eastern province of Anhui said.

"They tie magnets to steel wires, and fish for waste iron ore in the streams," he added.

Domestic steel mills are happy to buy their "catch", since China's rapidly growing steel output has strained domestic mines while sky-high international shipping rates have pushed up the price of imported ore.

Many of the mines are located in rural areas and the waste ore washes downstream through farms.

Iron ore prices are expected to rise 25 percent starting April 1, 2008. according to a Reuters poll of 12 analysts, with some looking for a 50 percent hike in prices.


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