Part 1: Overview
Looking ahead to 2030, WSD’s answer to the above question is “less strong.” China’s steel demand on a crude steel equivalent basis in 2030 is likely to be down 50-100 million tonnes from 950 million tonnes in 2019. The “driving force” will be the economy’s lessened steel intensity due to a lower GDP growth rate and rising household spending (that, due to its nature, is not steel intensive) as a share of GDP. Fixed asset investment, that’s highly steel intensive, is forecast to decline as a share of GDP. Overcapacity and intense price competition in the Chinese domestic market will persist for hot-rolled band although the industry will be far more concentrated as Baowu – now the world’s largest steelmaker with a capacity of about 100 million tonnes per year – and some others strive to double their output largely via acquisitions. More countries will have implemented trade actions against the Chinese mills limiting their exports. The Chinese steel companies will continue to be aggressive purchasers of distressed offshore steel mill assets.
In 2020, China’s mid-sized and larger steel mills – the principal members of the Chinese Iron and Steel Association (CISA) – are enjoying probably a record variation in performance versus steel mills in most countries (although not the leading Russians mills that benefit from: a) low cost company-owned iron ore and coking coal mines in some cases; b) ever-more-modern plants; and c) cost benefits in U.S. dollar terms due to the weakened Russian ruble). Many non-Chinese mills at present are suffering from deep production cuts, weak prices and losses.
In Part I of this report, WSD comments on some positives for the Chinese economy and its steel mills. Part II, to next be published, a discussion of the negatives.
Part I: Selected Positives for the Chinese Economy and its Steel Mills
The Chinese economy
- As of June 2020, the economy is already recovering strongly.
- The country’s savings rate remains high at about 45-48% of GDP.
- China’s fixed asset investment (FAI) is currently running at about 45% of GDP.
- Specialized governmental policymaking groups are experienced in quickly implementing new policies when needed.
- If China’s per annum GDP growth rate in several years slows to 4%, this will still be one of the higher expansion rates among the Advanced Countries.
- The education system is strong from kindergarten to graduate schools.
- The Chinese middle class has grown sharply. Also, a sizable number of entrepreneurs have become millionaires given the success of their own private company.
- The Chinese-backed Asian Infrastructure Investment Bank (AIIS) is outperforming the World Bank. It’s taking forward the country’s “Belt and Road” investments.
- The current inflation rate is moderate – about 4.5% per annum.
- The country’s holding of foreign exchange reserves is immense – at about $3.4 trillion.
- Sizable prior foreign direct investment (FDI) has made countless offshore manufacturers and retail establishments dependent on Chinese merchandise.
- Municipal debt is sizable; but, it can easily be refinanced.
- No political strife.
- A stable Communist Party structure, with wealthy families owning it.
- The massive rise in the kilometers of railroad track for high speed bullet trains.
- A sizable number of deep water ports.
- Parents seek to save sizable funds for their single child when needed.
Positives for the Chinese steel mills
The Chinese steel industry’s production performance in 2020 has similarities to what happened in 2009 during the Global Financial Crisis. Chinese steel production in 2009 versus 2008 rose 13.6% 568 million tonnes. By 2011, it was up to 683 million tonnes, or 88 million tonnes more than in 2007. Rest of World output in 2009 versus 2008 fell 20.5% to 659 million tonnes. In 2011, output at 835 million tonnes was still 16 million tonnes, or 1.9%, less than in 2007.
Other positives:
- Chinese steel production in April 2020, year-to-year, was up 0.2% to 85.0 million tonnes (62% of global output). Rest of World output fell 31% to 52.1 million tonnes.
- Chinese pig iron production in April 2020 was annualized at 835 million tonnes, up 3.2% from full-year 2019 output of 809 million tonnes – or, temporarily, in April this year, more than 70% of global output.
- Steel demand in 2019 rose about 8%. A further minor gain seems possible in 2020.
- China’s obsolete steel scrap recovery is accelerating.
- M&A activity is surging as the industry concentrates.
- Capital spending by Chinese steel has been running at about $80 billion annually.
- Migrant workers for most mid-sized and larger steel mills are only a minor share of the workforce.
- Since the second half of 2017, booming demand for rebar, combined with mid-2017 capacity reductions, have been positively impacting the industry’s supply/demand balance for some other products including hot-rolled band.
- Municipalities have a sizable ownership position in, and provide strong financial support to, local mid-sized and larger steel mills.
- Several Chinese steel mills own sizable nearby medium-cost iron ore operations.
- Chinese mills have been acquiring distressed offshore mills
- In May 2020, the median-cost Chinese steel mill had a hot-rolled band ex-works marginal cost of about $408 per tonne, prior to the expense to deliver the steel to the marketplace.
- The quality of Chinese steel products continues to broaden and improve.
- The construction cost to build a new steel plant in China is 40% lower than is the case in many foreign countries.
- Hebei Steel, the #2 producer, owns a sizable stake in Duferco, the world’s leading steel trading company.
- Chinese steel mills have not had the lowest prices for hot-rolled band on the world market because of good volumes and high prices in their home market. Wide hot strip mill capacity has been close to fully utilized.
- Chinese steel traders in recent months have purchased two to four million tonnes of offshore lower-priced steel products, including pig iron, billet, slab and hot-rolled band.
- The Chinese steel mills have good access to bank funds.
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