Chinese Steel Industry’s Improving Performance and Implications for India

Aravind Yelery, PhD, Assistant Director, Institute of Chinese Studies

China recorded the highest global production of steel in 2016 despite its slowed growth rate. This suggests that steelmakers were focused on boosting output because they were eager to capture higher profit margins.

Steel production in China increased to 68,510 thousand tonnes in October 2016 from 68,170 thousand tonnes in September. Monthly production in China averaged 29,010.98 thousand tonnes from 1990 until 2016, reaching an all time high of 70,650 thousand tonnes in March 2016 with a record low of 4,918 thousand tonnes in February 1990. The rising trend in capacity continued from 2015 when China’s national steel output was 1.1235 billion tons, up by 0.6 percent over the previous year.

However, China’s export-output ratio is the lowest among the world’s steel exporting countries at only about 15 per cent; in other countries this is more than 40 per cent. If both direct exports and indirect exports are considered, about half of the world’s steel is consumed outside the country of origin, while China’s export-(indirect net exports + direct net exports)/output ratio is only 20 per cent, lower than the world by 30 percentage points. This shows that China’s steel production is mainly used to meet domestic market demand.

 

Reform and Restructuring

Chinese steel giants which are mainly state-owned were traditionally occupied with the issues such as capacity utilisation, industry operations, and industrial organization. The restructuring and the management in production and sale is attempting to improve the prospects of the Chinese steel industry. Small and unprofitable companies have been shut and big steel giants are working together, and the trend is towards the state-controlled companies integrating their operations further.

Analysts suggest strong property sales in China along with the government’s push for more infrastructure projects via its public-private partnership (PPP) fund have strengthened steel demand while supply is under control as Beijing intensely pursues capacity cuts. This rising domestic demand coupled with Streamlining of supply and increasing production by Chinese companies, mainly state-owned enterprises, have helped stock prices surge. The Chinese Steel Futures jumped over 6 per cent to its highest level in 31 months on 28 November 2016, as investors raised bets that strong property and infrastructure investment will sustain demand in the world’s top consumers of steel, spurring a similar rally in iron ore and zinc. It is believed that the first half of 2017 will see higher steel prices because property sales will remain very strong at least till October and the PPP program is still in its early stages and supply side should remain under control. Another reason, which has impacted steel prices is the government’s direction to cut production in order to control the smog ahead of important meetings in the run-up to the 19th Party Congress. The Chinese central government has ordered steel producers from Hebei, Shanxi, Shandong, Henan province and those located in Beijing and Tianjin municipality to cut their steel output by half.

In November 2016, China’s Ministry of Industry and Information Technology issued the ‘Iron and Steel Industry Adjustment and Upgrade Plan (2016-2020)’ as a guide for China’s iron and steel industry in the next five years. The 13th Five-Year Plan period is seen as a key stage of China’s steel industry structural reform. The adjustment and upgrading plan includes ways to address the situation arising from overcapacity, and plans for innovation-driven, green development, intelligent manufacturing, improving quality and other aspects.

 

Implications for India

India’s iron and steel industry contributes significantly to overall growth and development of the Indian economy. The growth in the Indian steel sector has been driven by domestic availability of raw materials such as iron ore and cost-effective labour. Consequently, the steel sector has been a major contributor to India’s manufacturing output. Globally also, over the last two decades, India raised the bar in optimising the mining and processing of the ore and producing quality steel and occupied the top position in global steel industry. From a country with a fledgling status of one million tonnes of capacity at the time of Independence, it has today become the world‘s 3rd largest producer of crude steel preceded only by China and U.S.

Developments in China’s iron and steel industry – its transformation and upgrading – will impact India directly. In September 2016, for example, US Steel, Nucor, AK Steel and Arcelor-Mittal accused companies from China of routing shipments through Vietnam. While Indian steel industry is capable of giving its Chinese competitors a tough time, rising steel production by the Chinese and efforts to export them from third countries to evade tariffs should raise alarm here.

Meanwhile, the rising economic figures in India have also been attracting interest of the Chinese steel industry. The Hunan-based Tidfore Heavy Equipment Group has along with the South Korean steel major Posco signed an investment agreement worth US$150 million with Maharashtra-based Uttam Galva Metallics, to expand its Wardha unit. It needs to be remembered that the Indian company has an outstanding debt of Rs.3,000 crore and bankers had asked the promoters to bring in investors to cover this debt. It was thus that the Chinese investors were brought in to deal. While Chinese look for the chances to enter into India’s strategic core industries, cases like these illustrate the potential for massive change in the Indian landscape in the coming decade.

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