Steel
Feature Articles
China's Steel Pandemic Recovery
May 2021
China’s steel industry recovered quickly after the initial outbreak of the pandemic led to a 1.6% y-o-y slip in March 2020 to 79Mt. For the past 12 months, China's average monthly crude steel production has increased 9.5%, while the Rest of World (RoW) has decreased by 6.7%.

While this divergence was more pronounced during April to August last year (when blast furnaces operations temporary shut-down), this gap has recently begun to normalise. China was fast to act on government stimulus which supported its steel industry as demand in infrastructure and residential construction increased.      

 

 

What Next?

During the first wave of the Covid-19 pandemic RoW monthly crude steel production (y-o-y) decreased by approximately 30% in April 2020. The impact of the pandemic slowly permeated RoW crude steel production levels as countries contained the virus at different time periods. In contrast, China’s eight-week lockdown during January and February 2020 was short and sharp. RoW monthly crude steel production did not record positive results until November 2020 with 3.4% y-o-y. Moving forward, governments around the world have taken on  

Unprecedented levels of debt (beyond the Financial Crisis 2008) to support the economy and to promote a strong recovery. Stimulus measure have included fiscal and monetary policies, as seen by record low interest rates in the advanced economies, along with government bond purchase plans, individual household payments and infrastructure programs, just to name a few. Up to 2024, AME forecasts average growth of crude steel production for China and RoW to be 1.3% and 5.1% respectively.     

 

 

Steel Capacity Insights

Global steel overcapacity has been an ongoing challenge for all countries. In September 2016, G20 leaders formed the Global Forum on Steel Excess Capacity (GFSEC). An international organisation aimed at finding a global solution to the issue of excess capacity and to enhance market functioning of the steel industry. Information sharing is based on cooperation and transparency regarding issues such as historical steel capacity, net changes in steel capacity, future steel capacity developments and government incentive provided to steelmakers or other market distorting incentives.   China and Saudi Arabia have not participated in the GFSEC member forum since 2019, while India is expected to recommence membership in 2021.

The OECD has estimated the average global steel capacity-demand gap between 2006 to 2020 was approximately 670Mt. In Japan, JFE Steel and Nippon Steel have announced to the market their reduction in steel capacity from blast furnace technologies will be approximately 11Mt by March 2024. This can be explained by Japan’s domestic steel demand declining due to an aging population, changing government policies towards carbon emissions, and rise of South-East Asian steel capacity. Finally, Japan’s steelmaking facilities are beyond fifty years old, which significantly increase the fixed cost associated with maintaining efficient steelmaking operations compared to an equivalent newer blast furnace operation.  

The Chinese government has previously reported 140Mt of unauthorised induction furnaces (IF) capacities were eliminated in 2017. The members of GFSEC are sceptical of these historical reported closures due to the amount of crude steel production in China currently, and its previously reported capacity levels, compared to RoW during 2020. Subsequently, crude steel production in China and RoW as 1,065Mt, up 7%; and 811Mt, down 7.6%, respectively y-o-y. This also places doubt on the accuracy in China’s capacity replacement scheme which commenced in 2015. The aim of this policy was to replace outdated ineffective capacity with new crude steel capacity and without increasing China’s total capacity. It’s very likely some producers have increased capacity rather than reduced capacity, by using loopholes in the system and simply falsifying its reporting numbers to the government.

 

The Future of China

The rise of China's crude steel production is remarkable. In 2005, they represented approximately 31% of global crude steel production. AME forecast China’s crude steel production to be 1,084Mt or 55% of global production. While by 2040 we expect global crude steel production to be 1,295Mt or 45% of global production. RoW production will exceed China by 2030 as crude steel capacity increase in India and South-East Asian region due to urbanisation and increased wealth.

 

 

Steel Market Exits

A healthy steel industry at a basic level requires no intervention by the government. Competition and market forces are naturally determined by the producers and consumers. In other words, Adam’s Smith ‘invisible hand’.

The efficient steel producers will grow and become more profitable, while the unviable steel producers will shrink and eventually leave the market due to being unprofitable. The above utopia does not exist. The demand for steel is relatively inelastic, which means when there is a price decrease the market will not grow larger. On the contrary, the producers of steel will try to cut their prices further to take business away from its competitors.

Government subsidies and other support measures of domestic steel industry have distortive impacts with contribute to the overcapacity in the industry. Cash grants will be used by a company to cover their fixed or variable cost. This will help cushion their financial loss during the downturn and allow firms to maintain their operations. Incentives such as cost refunds can be included on such items of raw material inputs, labour, and land.

All impact by reducing the variable cost and encourage the steelmaker to continue its operations. Governments can provide support via loans below market rates. Preferential loan treatment can also be used by the company to finance investment in new equipment or technical upgrade and the loan would ultimately lower the fixed costs. Government may also provide support by way of tax credit linked to the purchase of equipment. Factors like firm size, firm ownership, and political connections of the firm may play a role in effectiveness at gaining subsides and government support measures.

 

 

The cyclical nature of the steel industry surrounding demand means firms have an incentive to delay the retirement of any steel making facility as during the next economic expansion its services will be required. The greatest challenge will be effectively transitioning steel workers to new employment.

The geographic location and concentration at dealing with steel industry exits is a major factor to take into consideration. Steelmaking facilities tend to be clustered and concentration towards the resources of raw material or coastal areas to take advantage of trading. Continuous up-skilling is now more important than ever in view of increasing automation of production processes and tasks, in particular for workers that carry out routine tasks. Assisting workers and communities affected by plant closures will be the governments next challenge.