Steel in China

Today, steel is old news in China. Gone are the days of the Mao Zedong era, where, in the 1950’s, the emperor fueled a national obsession over the industrial metal.   According to a recent article from the Wall Street Journal, “In the five years up to 2017, Beijing wants 80 million metric tons of old steel making capacity wipe from existence nationwide.” The decision amounts to 7% of total current capacity.

Managers of steel plants, once fervently courted by party bureaucrats and business leaders, told reporters three years ago that they no longer felt welcome in Beijing.

A worker standing on a pile of rusting steel at the closed Shougang Capital Iron and Steel plant in Beijing

A worker standing on a pile of rusting steel at the closed Shougang Capital Iron and Steel plant in Beijing

What happened?

Part of it is the development of environmental policy. Public pressure grew on the government for policy changes as Chinese became more aware of the health risks of the smog generated by thousands of steel mills scattered across the country. President Xi Jinping last November revealed historic climate targets to reduce coal use that would inevitably affect the steel industry, one of coal’s largest buyers.

Economic slowdown is another reason. To fend off the effects of the U.S. financial crisis six years ago, Beijing flooded its banking system with trillions of yuan and told banks to lend aggressively. The steel industry was one of the prime recipients. From 2008 to 2014, Chinese mills added roughly 540 million tons of steel making capacity, by now totaling 14 times the annual steel output of the U.S, says the article.

By 2014, however, it was becoming clear that China’s steel demand was not growing. Steel oversupply flooded the market and Chinese steel prices fell 55% starting in 2012, and have not yet cease to fall.

“Mills are now under pressure as China’s economy slows to its weakest growth level in 25 years.” The industries that fuel the steel furnaces have already been sinking, partly due to global oversupply.   As a result, iron ore mines have become ghost towns, coal mines are disappearing, and steel mills are losing the ability to pay for the debt they so willingly took on.

The government is trying to come up with innovative was to make the industry more efficient. One is to push steel factories overseas.   Another, announced in 2014, is to let foreign investors take equity in the steel sector.   The article claims that there have not been any takers, so far.

 

5 thoughts on “Steel in China

  1. It will be interesting to see if President Xi’s environmental promises to cut down on coal use actually end up effective. They plan on using a cap and trade system to limit usage of coal and other CO2 contributors. However, they only promised to peak usage of coal by 2020, with very little specifics on rates of cutting coal usage. The steel industry will need to adapt to a different source for fuel other than coal, but how well the Chinese implement these promises will determine how drastic of a change the steel industry needs to undergo.

    • If steel output falls back to “sensible” levels (can we define that as economists?), then China will be well on its way to meeting those commitments without needing to do anything!

  2. Much like Mexico’s government is granting foreign corporations the ability to come in to the country and develop the oil & gas industry in the country, China might be wise to allow foreign investors to get involved in their steel industry.

    • So what, they can shut down their new acquisitions? Isn’t the issue at hand one of excess capacity in basic steel for construction?

      Now the above article focuses on the supply side. Not noted is the political economy of steel production, tied to local governments and local infrastructure projects. Local politicians benefitted in status if not in side income from such projects, and as noted had ready access to funds, at least in the midst of China’s (successful) efforts to avert a slowdown during our Great Recession. That means factories that are widely dispersed, uneconomically small and must face logistics challenges to get coal and ore to their smelters. (A reminder: I teach Econ 274 China’s Modern Economy….knowing the political context of other economies is important!)

      This also hints at the demand side: the Great Recession is largely over, and thus the need for fiscal stimulus, while the national transportation infrastructure (expressways, high-speed rail) is largely complete. Urbanization is slowing, too. So slows demand for the commodity steel consumed by both horizontal and vertical projects (that is, roads and buildings – pretty much separate industries in terms of both the corporate players and the [pun noticed] concrete skill sets).

      Now, if you have excess capacity, what happens to prices? If you pick up orders, you can readily … does this fit the Bertrand price war structure? How about the US market? Can steel be shipped across the Pacific? Or through the Suez to Europe?

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