May. 28 2019 — Until a few years ago, market updates from major iron ore producers Rio Tinto and BHP routinely stated that they expected Chinese crude steel production to reach 1 billion metric tons sometime between 2025 and 2030.
This sounded like an incredible amount of steel, particularly as China’s economic growth trajectory was heading south. Further, such a prediction seemed unrealistic given China’s steel output had retreated by 2.3% in 2015 to just under 804 million mt.
For many Chinese government officials and steel analysts, the argument went something like this: steel consumption had peaked in 2014, Beijing was slashing steel capacity under its supply-side reform agenda, and the country was shifting toward a higher- value, consumption-driven economy based on cleaner technologies.
In short, the era of massive industrial capacity build, so-called “ghost cities”, toxic assets, ballooning debt and excess that China was known for, was coming to an end. China had embarked on a new era of sustainable growth, with its “blue skies” anti-pollution policy at the fore. In this setting, surely there was no way steel output would ever reach 1 billion mt?
So it came as a huge surprise that steel output increased by 15% over the past two years. China produced a record 928 million mt of steel in 2018, up 6.6% on the year before, according to the World Steel Association. Most forecasts at the start of the year envisaged output growth of 1-2%. Perhaps the 1 billion mt mark was not so far-fetched, as it would require less than 1% CAGR over the next 10 years to reach this level. Indeed, China started 2019 at a gallop: February’s steel output of 71 million mt was up 9.2% on the year before.
S&P Global Platts expects steel production to rise this year by 2-3% to 947-956 million mt as mills keep run rates high to take advantage of decent margins.
The key concern for the rest of the world is that if China’s economy slows and domestic demand is not strong enough to absorb all of the steel it produces, its exports could destabilize global steel prices as they did over 2014-2016. During this period, China exported more than 100 million mt of steel each year. By the end of 2015, steel and raw materials prices reached a nadir.
In the Midwest region of the United States, domestic hot-rolled coil prices averaged $373/short ton in December 2015, lower even than during the global financial crisis and 40% down on the same month a year earlier. Not surprisingly, many international steel companies were forced to slash production and staff, unable to continue operating at sub-economic prices. Some steel companies never recovered and were subsequently forced to find a buyer. A plethora of antidumping duties have been introduced to protect local steel industries and last year the US applied a 25% import tariff on steel from many countries. But trade protection measures often just shift the supply pressure problem from one place to another: as one door closes, exporters try to open another.
The topic of China’s steel overcapacity has often been brought up at international government meetings, such as the G20. China has long been the US steel industry’s bête noire – despite Chinese steel accounting for less than 2% of US steel imports – and the Section 232 import tariffs on steel and aluminum proliferated into a wider trade conflict. At the time of writing, tensions between China and the US had eased and a further tranche of tariffs had been delayed by the Trump administration.