Janaury 2004

China Drives Global Steel Market with Escalating Demands

China is the world’s largest steel consumer, accounting for one quarter of the world’s total usage of steel in 2002. The demand for steel is being driven by an economy that is expanding by 8% a year. The consumption of finished steel grew by 37 million metric tons, or 20%, in 2002. Demand is expected to continue to grow by at least 20 million metric tons (approximately 10%) annually.

Accelerating consumption of steel is often associated with the investment phase of a developing economy. This is well illustrated by the growth in China since the government decided to move away from a state-controlled economy. A number of major infrastructure projects have also been started. These include:

•Major facility and infrastructure development in preparation for the 2008 Olympic Games in Beijing.
•The re-building program in Shanghai that was started in the early 1990s. This program continues with a start being made on the building of a deep-water harbor to provide an international shipping center.
•The Great Western Development plan. A five-year project to attract foreign investment and build infrastructure in the western regions of China.
•Over the past decade, the strong growth in China’s demand for steel has helped the world steel industry to cope with excess capacity following the collapse in demand in the former USSR. But will the on-going growth in demand in •China be a solution or a problem for the world steel industry?

In 2002, China accounted for 20.1% of world crude steel production. In 2003, the upward trend has continued. In the first seven months of 2003, China produced 22.25% of the world’s crude steel. Domestic steel producers are planning major expansion of their capacity to meet the expected growth in demand.

The high rate of growth in the Chinese economy is a cause for concern. In the period from January 1 to July 31, 2003, Chinese banks loaned more money than they did in the whole of 2002. Yet more than 17% of the new office buildings in Beijing and Shanghai remain empty. The Chinese currency, which is linked to the U.S. dollar, is widely held to be undervalued. Some observers say that it should be re-valued. The Chinese government accepts that this will happen eventually, but believes that to act in the near future, before further economic reforms are in place, would be premature.

The increase in the Chinese steel market has had repercussions on the world steel industry. The market for raw materials has become extremely tight, primarily due to China’s increasing needs. World raw material prices and freight rates have been driven up as a result.

The Chinese market presents many opportunities for the iron and steel industry. However, these opportunities are only available as long as the momentum continues. If the momentum stops or slows there are dangers to the equilibrium of the world steel industry. If Chinese demand growth slows, excess production may be diverted into other markets.

There is also the possibility that Chinese growth will continue unchecked. This may lead to continued tightness of raw material markets and further pressure on the world steel industry over the next few years.

One thing is certain, China will continue to have a long-term effect on the future of the world steel industry, whatever the outcome.

—Printed with permission from International Iron and Steel Institute