The last year has seen significant structural advances in China’s steel industry as the country attempts to introduce high value-added elements to the sector.
All told, China produces a third of the world’s steel. Its domestic industry has grown rapidly over the last five years, a trade deficit of 35.4 million tons of steel in 2000 being turned into a 66 million-ton surplus in 2003.
China is the world’s leader exporter of steel products. In 2006, offshore sales rose 91% year-on-year. Total output hit 418.78 million tons in 2006, up 18.48%.
However, the focus is changing from crude steel largely used in construction to higher grade flat steel used in planes and automobiles. This movement into the top echelon requires significant improvements in the manufacturing process and will throw China up against the best international steelmakers.
A need for ore
As its own iron ore supplies are low grade, China is forced to rely on imports of this key component in its steelmaking process.
Unlike other commodities, prices for the majority of seaborne iron ore traded around the world are set annually. Anglo-Australian companies Rio Tinto, BHP Billiton and Brazil’s Companhia Vale do Rio Doce (CVRD) mine about 70% of the world’s supply; then one of the top iron ore buyers – traditionally steel mills in Japan and Europe – negotiates a benchmark price. This sets a contract price which the rest of the world follows.
Following Beijing’s anger at a 71% price increase agreed for the 2005 contracts, China was asked to lead the negotiations on 2006 prices.
Represented by Baosteel, the country’s leading steel producer, China allowed the talks to drag on for months as it held out for a smaller price rise. In the end, frustrated rivals started making individual deals with the mining companies based on a 19% increase. China was obliged to do likewise.
Leading the negotiations once again in 2007, Baosteel agreed on a 9.5% benchmark price increase in record time. China’s iron ore imports for the first four months of 2007 were 133.6 million tons, up from 108.3 million tons on the same period last year.
Thinking ahead, Baosteel has also inked several long-term contracts, such as a deal with CVRD for 19.4 million tons of ore between 2007 and 2017, and 8.1 million tons between 2018 and 2031. Furthermore, China has begun buying up overseas mines. In 2006, CITIC Group purchased two Australian iron ore companies for US$415 million.
In terms of domestic steel production, the government unsurprisingly continues to be a driving force.
In years past, state policy guided steel output through rebates and subsidies but at the price of inefficient and energy-consuming mills. In response to this and further WTO-instigated integration, Beijing has moved to speed up consolidation in the industry.
The plan is to have output controlled by just a few conglomerates by 2010 and this has seen billions of dollars invested in the country’s top steel plants, including Shougang, Wuhan Iron & Steel and Baosteel. The latter produced 23.8 million tons of steel in 2006, making it the world’s six-largest steelmaker. Arcelor-Mittol is number one.
The rapid growth of China’s steel industry has also created openings for overseas players who trade expertise for market access. Germany’s ThyssenKrupp has a 60% stake in a stainless steel project with Baosteel worth US$1.84 billion. It has also invested US$180 million in a hot-dip galvanized steel plate project with Anshan Iron & Steel.
However, in order to regain control, the government has placed strict limits on foreign firms controlling shares in large Chinese steel companies. The attitude is more flexible where smaller steel operators are concerned.
Looking at the long-term picture, iron ore price negotiations and structural adjustments will continue to dominate in this expanding industry. Nevertheless, China is still a net importer of steel and is likely to remain so for the next few years.
Steel demand is expected to peak in 2010, but per capita steel production is still far below the level of developed countries, so the potential for future growth looms large.