Nations steel themselves for China's needs

PUBLISHED : Saturday, 03 January, 2004, 12:00am
UPDATED : Saturday, 03 January, 2004, 12:00am

STEEL IS ONE industry where China's breakneck economic growth has already sent ripples across the world.

A seemingly insatiable appetite for steel and its raw material - iron ore - has driven up global prices and demand. And as both the world's largest producer and the largest importer, China's growth is spurring renewed investment in mines and steel plants from as far away as Australia and Wales.

Recent moves to rescind tit-for-tat steel tariffs have stoked conviction that this heavy industry, too often on its knees, might find some new legs. Even dogged US steelmakers may have to concede China's growth might even safeguard, not sacrifice jobs.

Cynicism persists, however, that the predictable steel cycle will resume. Prices rise, production increases and someone will be left holding worthless girders as the inevitable price collapse arrives. But this time it could be different.

Closer alliances with companies around the region should help to introduce more supply-side discipline into the market. And the evidence of a sustainable uptrend in China's demand looks persuasive.

China generates a staggering array of steel statistics, yet it still doesn't come close to satisfying its own demand.

Last November it claimed a world first after it surpassed 200 million tonnes of annual steel production. Despite this, its steel imports still account for 25 per cent of the world's total steel sales. World steel production was 788.5 million tonnes in 1999 and is expected to have reached 960 million tonnes last year.

If the China Steel Industry Association forecasts are to be believed, the good times will continue. It expects the industry to maintain an annual growth rate of 20 per cent in the next five years, and steel output to surpass 300 million tonnes by 2005.

The increase in production and demand has seen steel prices advance last year. US hot-rolled coil steel prices have been well above US$300 a tonne, against about $220 at the start of 2002.

China's growth also looks to be offering a reprieve for Japanese producers. A new trend is for Japanese steelmakers to go direct to China rather than focusing on the traditional mercantilist competition.

Recently Nippon Steel forged a 6.5 billion yuan joint venture with China's Baoshan Steel, allowing it to follow the path trod by Japanese carmakers, who already have joint venture manufacturing facilities in China.

Nippon brings technical expertise in automotive steel sheets, and gains direct access to the biggest steel market in the world. This could also bypass the problem of freight rates reaching all-time highs.

China's growing car industry is perhaps the most visible driver of steel demand, with Ford and General Motors both announcing major investments last year.

And there is also a new trend in the sector, to produce cars such as the VW Passat for export.

Almost half China's steel demand is in the construction sector which raises some concerns it could be susceptible to any housing slowdown. Yet infrastructure investments and large projects such as the 2008 Olympic Games point to sustained demand.

An example of China's new growth dynamic can be seen in the shipping industry. Here the corollary of China's fast growing trade is it needs to transport it.

Its domestic shipbuilding industry will get a substantial boost with US$3.6 billion in investment earmarked for a new shipyard at Changxing Island outside Shanghai.

Beneath the groundswell of optimism, the problems of inefficiency and lack of scale that beset much state-owned industry remain.

More than 60 per cent of China's 300 steelmakers have annual output of less than 100,000 tonnes and production is often focused on low-grade steel.

Much new investment is focusing on upgrading technology and reduction of pollution, as the government has highlighted the need to control overinvestment and overcapacity. Inevitably, the smaller, less efficient plants will be most exposed to any price reversal.

Only time will tell if China has indeed reordered the cycle in steel prices.

For now, its growth momentum looks hard to bet against.

And as prices remain high, profit margins should be sustained, meaning you are unlikely to find many steel producers complaining about China's growth.