China is currently the world's largest producer of steel products, growing from just over 30 million tons per year when economic reforms began in the 1980s and surpassing the 100-million-ton mark in 1996 to 272 million tons in 2004. China now produces a third of the world's steel.
Steel production was up 28% year-on-year for the first half of 2005, and the yearend projection for the total production 332 million tons. Meanwhile, the estimated demand for steel in China for 2005 increased about 10% over the previous year. Although this relatively low demand in relation to production would intuitively imply slide in prices, steel prices have actually been driven higher by a steep climb in raw material costs.
The remarkable performance of China's economy tends to manifest itself in ungraceful strides, and the steel industry is no exception. Overall growth, along with adjustments in the domestic steel product mix and increasing participation in global steel trade, has had a chaotic effect on steel prices since the 1990s. And while steel shortages may emerge with little warning, new production facilities take years to come online. The result is a cycle of shortage and oversupply.
Central planners are presented with the task of having to stabilize new production and regulate imports to meet domestic needs under fast growth, while supervising the sector's modernization. New steel plants must meet ever-higher quality, efficiency, and environmental standards. Japan has expressed interest in helping China implement cleaner steel production technology. In return for its support, Japan would be allowed slightly higher emissions levels under the Kyoto Protocol.
In anticipation of entry to the WTO, China targeted 225 small steel enterprises for closure, but despite this, the country's steel is mostly produced by a large number of small, inefficient factories. As the world's top steel-producing country, China only claims one of the world's top ten steel enterprises in terms of production volume: Shanghai's Baosteel.
Baosteel is China's largest steelmaker and number six in the world. Founded during the onset of economic reforms in the late 1970s, Baosteel is the most efficient and advanced steel plant in China.
In 2005, the government made consolidating smaller factories into larger companies a priority in order to increase efficiency in the highly fragmented industry. The end goal of this process is to create large regional steel giants throughout the country.
To bolster China's most promising steel enterprises, the government has poured billions of dollars into Baosteel, Shougang in Beijing, Angang of Liaoning Province, and Wuhan's Wugang.
The good news for foreign investors is that technological gains in China's steel industry are pushed along by the cycle of death and renewal. Need for better technology has created an opportunity, even necessity, for involvement from abroad. Some of the world's largest steel producers have jumped at the chance. German steel firm ThyssenKrupp owns a 60% stake in a stainless processing operation with Baosteel worth US$1.84 billion. It is also involved in a US$180 million hotdip galvanized steel plate project with Anshan. In a similar project worth US$785 million, the world's number one and number two largest steel producers, Arcelor of France and Nippon Steel of Japan, also teamed up with Baosteel to meet the demands of China's auto industry. In 2005, however, China put strict limits on control of Chinese steel companies by foreign firms. The government formally declared that no foreign investor could gain a controlling share of any large Chinese steel company. The rules, however, are more flexible when dealing with smaller companies.
Accessing raw materials
Shortages of raw materials have forced China to tap into overseas sources. To ensure long-term stability, China's steelmakers are not only sourcing from but also buying into overseas mines. China International Trust & Investment has planned a US$1.3 billion mining operation in Western Australia that will produce 45 million metric tons of iron ore a year. In 2004, Baosteel launched a 20-year joint cooperation with Rio Tinto in Western Australia that will extract 10 million tons of iron ore per year. Baosteel has also invested in Brazilian mines with partner CVRD.
Despite the rapid expansion of its steel industry, China is still a net importer of steel, and is likely to remain so for the next few years. But through development and modernization, China has set its sights on becoming a net exporter in the future. Some predictions see China's steel demand peaking in 2010, but with per capita steel consumption still far below the level of developed countries, vast potential for further growth remains.
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