China is the world’s steel giant, accounting for half of the world’s production and consumption. The next largest market is the EU at just 10%, which demonstrates just how much the Chinese market drives the global steel industry.
Investments in infrastructure, construction and manufacturing have driven China’s exceptional economic growth and the country’s demand for steel. As purchasing power increases, China is shifting from investment-led growth toward consumer-led growth, which raises concerns about the country’s future demand for steel.
Demand drivers in real estate and automotive
Steel demand depends on economic growth. China’s gross domestic product growth slowed to 6.7% in 2016, while fixed investment (such as buildings and machinery) grew at only 3.2%. Compare this to growth levels of 10% and 12% respectively in 2010 and it’s clear to see why some are concerned.
However, China’s national statistics show industrial output grew by more than 6% in the first two months of 2017, signalling a stabilising of the economy. In addition, policy makers are targeting 6.5% growth for 2017 suggesting steel demand should remain stable.
In 2016, housing sales surged on easy credit and market speculation, thus supporting steel demand. The price surged enough to prompt policymakers to intervene to stabilise the market. Despite their efforts, however, property investment in January and February rose nearly 9% from a year earlier. This clearly shows that the housing market is doing anything but slowing down. As the construction sector makes up almost half of China’s steel demand, the country’s overall steel demand should at least remain stable.
The automobile sector is another important contributor to Chinese steel demand. Car sales were boosted in 2016 after solid governmental tax cuts. As the tax cut winds-down over 2017, near-term sales are expected to remain flat. However, due to rising household incomes, the long-term forecast is for sales and production in China to grow, thus further increasing the demand for steel.
Reducing excess capacity
Despite generally high steel demand, the country suffers from significant excess capacity. Inefficient steel mills and high pollution levels have led top planners to restrict steel and coal output, with plans to cut up to 150 million tons of steel capacity and 800 million tons of coal by 2020. Consequently, these mine closures have been driving up the global price of coking coal, a major ingredient used in steelmaking.
China still needs to import higher-grade iron ore
To produce steel, iron ore must be converted using coking coal. Iron ore comes in various grades of iron content; the lower the grade of iron ore, the greater the volume of coking coal required to make the conversion. Last year the prices of both iron ore and coking coal surged, with iron ore doubling and coking coal tripling in price.
As China holds only lower grade iron ore, and coking coal prices remain relatively high, it is more profitable, and less polluting, to use the higher-grade ore found on the international market. This bodes well for neighbouring Australia, as it’s likely to see increased demand for its higher-grade iron ore.
While China’s steel demand will depend on factors such as economic growth, the construction sector and the automobile sector, the nation’s aim to cut excess capacity and reduce pollution levels should keep the demand for importing iron ore strong going forward.