A profile of China’s iron and steel industry

China's iron and steel production continued to maintain a high growth in the first three quarters of 2005, though the price of steel products has been falling since April in the same year. It is estimated that China's annual steel output will soon reach 330Mt - enough to meet the market demand of 2010.

In the first three quarters of 2005 China produced 255.29Mt of crude steel, up 27.39% year on year; 239.2Mt of pig iron, up 30.98%; and 268.82Mt of rolled steel, up 25.82%. Of 268.82Mt of rolled steel, plate product accounted for 104.08Mt or 38.72% of the total, up 2.48% points year on year; and long product made up 137.82Mt or 51.27% of the total, down 2.61%. The change in the proportion of rolled steel reflects that the structural adjustment of rolled steel is developing toward the expected orientation. Despite fast growth of production, China still needs to import a large amount of high-class steel as quality of production is still low.

In the first three quarters, China imported 20Mt of rolled steel, down 16.4% year-on-year, more than 85% of which was high-class product; and1.08Mt of steel billet, down 70.3%. Meanwhile, it exported 15.80Mt of rolled steel, up 83%; and 5.98Mt of steel billets, up 112%. However, the import of rolled steel showed a trend of big increase in the recent months. For instance the import of rolled steel grew 16% in August and 40% in September. Converting rolled steel and steel billets into crude steel, China had a net import in the third quarter.

New supply of rolled steel was accumulated to 288.82Mt from January to September, up 22.3%. Of the total, 34.74Mt was added in September, up 22.3%. The apparent consumption of rolled steel on the domestic market amounted to 273.02Mt in the first three quarters, up 19.25%. The growth of the demand is attributed mainly to the increase in the fixed assets investment of the whole society, added value of heavy industry and export trade of electromechanical products.

Table 1: The above table is a listing of China's output of iron and steel products in January-September 2005 and the percentage changes over 2004.

Table 2: Showing China's export of major iron and steel products in January-September 2005 and the percentage changes over the same period of 2004. (Unit: US$1,000)

Iron ore

Fixed assets investment in the iron and steel industry reached 173.3 billion yuan in the first three quarters, up 28.1% year on year, and the growth fell 12.3% points from the year- earlier period. The fixed assets investment scale remained a little big in general, so the industry has to keep alert to the negative influence to be produced by the overgrowth in the production capacity.

China turned out 279.65Mt of iron ore in the first three quarters of this year, up 29.6% year-on-year, and the growth momentum will be kept the whole year. The 68 large and midsize iron and steel enterprises monitored by the China Association of Iron and Steel Industry (CISA) realized sales revenue of 903.19bn yuan in the first three quarters, up 25.63%; profits and taxes of 113.992bn yuan, up 15.45% and profits of 65.345bn yuan, up 11.73%.

According to CISA, both absolute profit and profit growth of China's major steel enterprises showed a downward trend. They raked in profits of 25.6bn yuan in the first quarter, 14.8bn yuan in the second quarter, and 16.5bn yuan in the third quarter, and their profit growth rate, which stood 19.01% in the first quarter and 39.91% in the second quarter, became negative in the third quarter.

Current trends

The number of iron and steel enterprises in loss and the amount of losses showed an upward trend. Up to 12 iron and steel enterprises, instead of seven in 2004, incurred losses in the first three quarters of this year, and the amount of losses swelled 129.09%. If the current trend cannot be reversed, the whole industry is likely to incur losses, predicted Qie Xiangdong the deputy secretary general of CISA. According to Chen Kexin, an analyst of the China Logistics Information Centre, China's rolled steel market in 2005 presented four characteristics such as strong demand, big increase in new supply, great improvement in the mix of products, and up-and-down market price.

Generally, despite a certain fall in the growth of consumption, China's demand for rolled steel remains strong this year. It indicates that the state's macro control is mainly to control partial overheating, not to retrench the whole industry, and the solid foundation to the strong growth of the rolled steel consumption hasn't been shaken.

The vigorous demand and high prices have stirred up the enthusiasm of domestic enterprises and importers, to produce and import rolled steel, bringing about a big increase in the new supply of rolled steel. It is predicted that the volume of additional rolled steel resource will reach or approach to 390Mt this year, obviously exceeding the consumption of the same period. The oversupply is a foregone conclusion.

Domestic production capacity has been greatly released this year. The whole year output of rolled steel is predicted to reach or exceed 360Mt, growing 20% over last year and making up more than one-third of the world's total.

Imports

China's import of rolled steel had shown a sharp upward trend in the second half, and if the trend continues, the country's import of rolled steel and steel billet is likely to reach 28Mt this year, surpassing the total of last year. The mix of steel product has a big change this year, with the output growth of plates and other high value-added products expanding remarkably, and that of building steel and other low value-added products staying at a low level. It indicates that China is gradually striding toward a powerful steel producer after being a big steel producer. The output of plates, strips and pipes has so far made up more than 50% of the country's total output of rolled steel.

Rolled steel price experienced a big vibration in 2005, from growing strongly to set a historical high in the first quarter, to dropping heavily to approach the production cost in the second quarter, and continued falling after a short period of rally in the third quarter. The price will go further down in the coming period of time, but the margin of decline will be small. At the end of September, the price of ordinary high-speed wire with a diameter of 6.5mm averaged at 3,204 yuan/t, dropped 7.3% as compared with the beginning of this year; that of screw steel with a diameter of 25mm, 3,098 yuan/t, dropping 9.1%; that of 1mm cold roll ordinary sheet, 5,451 yuan/t, down 17.7%; that of 20mm medium section, 3,371 yuan/t, down 27.2% and that of hot roll ordinary sheet, 3,737 yuan/t, down 25.6%.

Table 3: Showing China's import of major iron and steel products in January-September 2005 and the percentage changes over the same period of 2004. (Unit: US$1,000)

Targets

The drop in the price is both expected target of the state macro economic control, and a result of the oversupply. Though the price drop reduced the high profit of steel works temporarily, proper decline is favourable for the development of steel downstream industry, thus laying a solid foundation to the long-term growth of Chinese iron and steel enterprises. Meanwhile, the price fall is favourable for the readjustment of the product mix and steel enterprise structure.

In late September, prices on the domestic steel products market plunged, with the price of hot-rolled plates and rolls even shedding some 50% in some places. Such a phenomenon is abnormal, said Luo Bingsheng, vice-chairman of the association. According to Luo, the new resource supply on the domestic market stood at 37.36Mt in the first three quarters, up 18.6% year on year, while the domestic consumption grew 19.25% in the corresponding period, with the demand and supply basically coordinated. In such circumstances, it is abnormal to see sharp steel price fall, he noted.

Besides, the domestic steel price movement was in the opposite direction recently to international market prices, which climbed in Europe and the United States. The domestic steel price index has largely moved in pace with that of the international market since last year. The association attributes the recent steel price plunge to multiple reasons, such as general overcapacity in iron and steel production, sharp increase of plate imports in the third quarter, speculation and panic selling.

Outlook

Oversupply will become severe on the Chinese rolled steel market in 2006, putting a heavy pressure on the price. Price is more likely to fall than to rise, but the price will not long hover at the low level. Fluctuation will be the mainstream of the market in 2006, predicted Chen Kexin, an analyst with the China Logistics Information Centre. Though China has become the world's No. 1 rolled steel consumer with the consumption exceeding 300Mt, it hasn't reached the peak yet. If China's economy will realize a growth around 8% in 2006, its rolled steel consumption will reach or even exceed 380Mt, growing 10% over 2005.

The force to drive the consumption growth will come more from the domestic demand as the export will fall remarkably owing to the slowdown of the world economy. However, the boom in rolled steel consumption can not reverse the oversupply on the market, because the rolled steel supply has a bigger growth trend.

The increase in the new supply is mainly attributed to the concentrated release of domestic production capacity. After years of large scaled investment and construction, China's iron and steel industry will have to swallow the bitter pill of blind development in the coming year.

China's production capacity of crude steel exceeds 50Mt in 2005, and new production capacity that will be put into production in 2006 will be about 50Mt. New production capacity of rolled steel is bigger. By the end of 2005, the country has 12 more galvanized plate production lines, which bring additional production capacity of 6Mt.

If the country gives a full play to all production capacity, plus 20Mt of import, the supply of rolled steel will reach and exceed 400Mt in 2006, growing 15%. It can not be digested by domestic demand in the same period. The serious glut of supply is sure to strike a blow on the price. It is predicted that unless steel enterprises organize large-scale reduction on production in time, rolled steel price level in 2006 will be weak.

Certainly, the rolled steel price on the Chinese market will not fall to the bottom, that is, the starting point of this round of price hike in 2002, and it will not hover at such a low level for years either, said the analyst. It is because the rapid expansion of China's iron and steel output and consumption over the past few years has triggered off a sharp increase in the demand for iron ore, coke, heavy oil, power, transport and other raw materials and service and a corresponding increase in their price as well, thus resulting in a big rise in the iron and steel production cost.

Growth

The fixed assets investment in the steel industry reached as high as 173.3 billion yuan in the first three quarters, 28.1% more year-on-year. That means that the amount of new production capacity added next year would not be less than this year and it is hard to slash the 100Mt of backward production capacity as it concerns the interests of many localities. In addition, the iron ore price is expected to increase by another 10% next year. The steel industry will face stern challenges due to excessive production capacity and the high production costs.

China will maintain high growth in iron ore production in 2006 in a bid to meet the growing demand for it in the country's iron and steel sector, said Luo Bingsheng, deputy president of the China Iron and Steel Industry Association. He said that China will control the growth in iron and steel output in 2006 and give priority to upgrading of quality, expanding of product varieties, reduction of energy consumption and transformation of the growth pattern.

The country's iron and steel output will continue to grow in 2006, but at a pace lower than in 2005, he said. The iron ore producers are actively expanding production capacity, which will help to strike balance between iron ore supply and demand in general, he predicted. China's iron and steel enterprises will actively take part in the international iron ore price negotiation so as to enhance its say in the sector, he added.

Demands

There are 150Mt of steel smelting capacity and 143Mt of iron smelting capacity that are under construction in China at present; also in construction at present are 298 high furnaces and 203 rotating furnaces. It is estimated that by the end of 2005, China's annual steel output will reach 330Mt, enough to meet the market demand of 2010.

China will need 313Mt of steel by 2010. The iron and steel industry in China will reach a capacity of 313Mt of iron in 2005, while iron ore from the domestic market will be only enough for a production of 92.6Mt of iron. That means China will have to import 342Mt of iron ore, an increase of 200Mt from 2003.

Policy and prices

China Iron and Steel Industry Association has recently taken five major measures to rally steel prices that have fallen sharply since late September. These are: 1) Pushing forward enterprise merger and acquisition to phase out backward capacities and prevent excessive capacity expansion; 2) Setting up an output-demand coordination group in the medium and thick-plate and hot rolled wide belt, plate and roll fields on a voluntary basis of the enterprises to strengthen industrial self- disciplines. Such a coordination group may be extended to other steel products. 3) Requiring all members of the association, particularly plate and hot rolled wide belt makers, to control output and reduce their production in the fourth quarter by more than 5% to ease market pressures. 4) Increasing direct supply and direct sales to reduce intermediate links and prevent speculation. 5) Requiring steel makers to refuse steel products future trade so as to prevent the negative impact of forward contracts and other electronic transactions.

China's steel industry agreed to cut production by 5% to keep the prices from falling further, according to Qi Xiangdong, deputy secretary general of CISA. The move was taken to check the downward trend in steel price, which has been falling since the beginning of September when the international price has been rising, causing 95% of the steel works to sustain great losses.

The agreed production cut is not because of surplus production but because of the unreasonable price, said Qi, adding that it is the total production capacity that is in surplus but not output. China abolished the export tax rebate policies that encouraged enterprises to export billet and steel ingot. Experts said this measure aims to restrict the export of iron ore, whose price increases 71.5% from April 2005.

As China's economy develops, China needs more and more steel. However, China has little storage of iron ore, raw material to make steel. So China has imported large amounts of iron ore. Experts predict the imports of iron ore will continue to rise. As China continues to rely heavily on imports, the price soar of imported iron ore would bring heavy pressure to steel companies.

According to a report released by the State Information Centre, the cost of China's whole steel industry in 2005 will increase by 20 to 30 billion yuan (US$2.4-3.6bn), accounting for 20 to 30% of the industry's profits in 2004. China has decided to introduce automatic licensing management for the import of iron ore according to an announcement by the General Administration of Customs. All the iron ore importers are required to go through automatic import licensing procedures and go through the customs declaration and clearance procedures upon the strength of the 'Automatic Import License's issued by the Ministry of Commerce.

Excessive investment

The government has recently taken harsh measures to curb excessive investment in the iron and steel industry, including granting less loans for iron and steel projects and raising the capital requirement on iron and steel projects from more than 25% to more than 40%. China has to 'rigidly control' the growth of fixed assets investment in its iron and steel industry so as to avoid excessive expansion of the sector, said top policy-makers.

Participants of the executive meeting of the State Council, China's central government acknowledged investment in fixed assets in the industry had already been 'rather great' at the moment. The meeting said the industrial mix of China's iron and steel industry has to be further adjusted to ensure the healthy growth of the industry. Manufacture of products that consume a very large amount of energy and materials and cause heavy pollution had to be contained, while export of such products would also be put under strict control.

The meeting called for an accelerated shift of the growth mode in this sector, improved efficiency in the utilization of energy and resources, and an 'appropriate and economical' use of steel products. The meeting also underscored the importance of facilitating and consolidating China's iron and steel sector, optimizing its geographical distribution, and building a solid resource supply system by tapping both the domestic and overseas resources.

Exports

China has lowered the rate of steel export tax rebate from 13% to 11% as of May 1, 2005, in a bid to discourage steel export to help reduce steel prices in the country. The move followed the government's abolition of tax rebate for billet exports. According to China's commitment to the World Trade Organization (WTO), the Ministry of Commerce has abolished authorized management of steel products imports.

According to the Directory of Industries for Foreign Investment, foreign investment is encouraged in the following fields in the iron and steel industry: prospecting, mining and dressing of iron ore and the production of direct reduction iron and melt reduction.

Summary

China is moving from a large steel producer to a powerful one, even though prices unusually plunged in 2005 as the internal market became saturated. Domestic demand is growing rapidly giving rise to importation of iron ore as production capacity reaches a maximum.

The iron and steel output in China will continue to grow in 2006 but at a lower pace. As China's economy develops there is more need for steel and so tapping both domestic and overseas resources are crucial in keeping prices at a reasonable level.