Disadvantageous factors in development of China's steel industry - June 28, 2006

Although as summary, China seems to be a booming market and steel industry is still under development process because of huge local steel demand and sustainable development of economy, some adverse or restrictive factors must also be taken into account for their importance and potential influence within the next 10 years. 1. Increase in the steel demand expected to slow down remarkably. Some steel institutions forecasted that from year 2006 to 2015, yearly demand increase rate of steel in China will be 5.8%-6.3%. In 2000-2003, yearly average of the same figure was 20.7%. In 2004-2005, it dropped to 12.6%. It's obvious to find the trend of change in demand increase. The deep-seated reason of this is the change of China's investment on fixed assets. It's widely known that, in China, demand increase of steel is mainly driven by investment on fixed assets. This investment creates huge demand for steel. But, after over 20 years of investment on infrastructure and industrial assets, investment inflexion is showing gradually. Within 10 years, increase rate of investment on fixed assets will inevitably drop. 2. Mills' profit falling, capacity increase slowing Total number of China's steel mills is amazing. Without authorized statistical data, the number is estimated over 1000. Despite the restriction from central government, numerous new mills, mainly small and middle-sized mills, appeared all around the country in these years for tempting profits. Most local governments chose to support such mills for their own interests and did not report them to statistics bureau on purpose to evade punishment from superior government. Under such circumstances, competition will get fiercer and as result, mills' profits will fall. 3. Lacking enough infrastructures to support development of steel industry Electric power, water, dock, railway, etc, these foundational infrastructures are either expensive, or insufficient, actually are both. Take railway for an example: currently, China's total railway under operation is about 80 thousand kilometers and only 30%-40% demand for railway transportation can be met. This is a serious bottleneck for the steel industry. Both; raw materials such as coal, coke, and steel products can't be transported to their destinations freely. 4. Environment pollution. This is also a serious problem. Steel making is polluting process. There was almost no concept of environment protection in people's minds previously and now, such consciousness is coming around. But in many rural areas and even cities of China, both government officials and mill owners still don't want to take the pollution problem into account for several reasons. State has decided to close down lots of small coke mills, iron & steel mills to cut pollution sources and invest amounts of money to resolve pollution problems. But because various group interests' conflicts are involved, future results are vague so far. Without good ends of pollution control, no country could afford the huge environmental cost. Here are 4 factors that will be bringing negative effects to development of China's steel industry at least within the next 10 years. As we carefully watch the changes of present market, keeping an eye on these factors is also necessary.