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Wednesday | 16 May, 2012 | 10:07 am

Leveling off

By Gretchen Salois

China’s rate of economic growth ebbs and it’s impacting steel

May 2012 - Upward trends are not infinitely sustainable. China’s meteoric economic rise is reaching its peak in many areas, including the steel and automotive markets. Analysts’ opinions differ on the timing of the tapering-off process, but many agree China’s short- and long-term outlook indicates a gradual reduction in steel growth and demand. Although construction remains its largest market, China is an important player both as a producer and consumer of vehicles.

In March, Baosteel Group Corp., China’s third-largest steelmaker, said Chinese demand for steel for automobiles may be higher than last year as the government encourages spending, according to Bloomberg. The push for domestic demand means steel for automobile markets is expected to be a major factor in the company’s demand for products.

“China produced over 17 million vehicles last year—surpassing North America and Western Europe—and this could begin to approach 25 million by 2015,” says Richard Aldrich, director of industry research for GE Capital, New York, citing data from World Steel Dynamics. “However, the apparent steel consumption figures I’ve seen for China of about 39 million metric tons compares to China’s total consumption of over 600 million metric tons in 2011, so only about 6 percent of China’s apparent steel consumption.”

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However, Aldrich notes 39 million metric tons is a significant amount of steel. “Remember, total U.S. steel apparent consumption was about 98 million metric tons last year, so that’s about 40 percent of the U.S. total steel consumption,” he adds.

John Anton, director of steel service at Washington, D.C.-based IHS Global Insight, believes China’s 30 percent to 40 percent growth per year is at its end. “China’s auto industry should be flattening,” he says, adding he expects “three percent growth but not anything like the past three to five years.” Once companies have plants up and running, growth no longer grows at an accelerated rate. Anton believes China now has the capacity to manufacture vehicles and will not need to add capacity until the Chinese auto industry grows again.

The effect on steel
China’s steel industry is approximately seven times larger than the U.S. steel industry; however, China’s population is roughly four times more than that of the United States. The Chinese auto industry has started making low-quality steel for non-high-quality uses. Anton notes automotive manufacturers require the highest-quality steel. “You buy cars on how they look as much as how they drive. China can’t challenge that.”

While currently not meeting finish standards or commodity grade steel as produced in other markets, “the more they try to make higher grade, that should tighten up the sheet market,” Anton says, adding growth in the automotive industry potentially is significant. “If the Chinese auto industry starts growing, it will tighten up the market, but the market has some slack in it.”

China has lagged behind other producers, such as the United States, in production of high-end auto-grade quality, says Aldrich. “They are not leading suppliers to auto OEMs despite their enormous steel output,” he adds. “However, I do think this will change over time. In their new five-year plan, they explicitly aim to achieve 8 million metric tons of high-quality steel production capacity by 2015.” With China being the largest steel producer in the world, “I don’t see how they don’t make serious inroads here,” Aldrich adds.

Aldrich expects slower growth both in the near term and in the long term compared with the growth rate of the past few years. “Near term, this is a function of [Chinese] government efforts to slow growth and overheated property markets,” Aldrich says. “Longer term, it is simply a function of the law of large numbers (i.e. once you get so large, the growth rate can’t just continue on at the same pace).”

The economy will shift over the long term from growth led by fixed asset investment to more of a consumer-based growth market of which consumer-based growth is much less metal intensive, Aldrich says. However, “China will still undoubtedly be the major driver of metals growth globally for many years to come as it has been over the past decade or so,” he says.

Avenue of opportunity
Branching off China’s production and consumption of steel, some analysts look further down the supply chain as to where China may make a larger impact. Anton questions whether China’s auto parts production may affect the parts market, “more than steel directly.” “You could possibly see some direct effect on the next step of the supply chain. If China starts using, exporting—but as a shift. I’m not an alarmist.”

If the auto parts market has an impact on steel consumption, Leo Dokos, principle analyst of chemicals, materials and food industry for Frost & Sullivan, suggests plastics may also affect steel consumption. “If China decides to pursue the lightweighting of vehicles [in this case replacing steel with plastic], that could have an adverse effect on the market as 50 kilograms of plastics replace 150 kilograms of steel,” he says.

U.S. imports of China-made parts jumped 23 percent to $11.8 billion, according to an estimate by the U.S. International Trade Commission. “The Detroit 3 Tier 1 suppliers and aftermarket distributors typically import Chinese components that are labor intensive, easy to ship and don’t require a lot of engineering,” Aldrich says. “Given the rise in Chinese wages, it is possible that Chinese imports into the U.S. may slow at some point, with the slack likely taken up by other low-cost country sources.”

According to Washington, D.C.-based Stewart & Stewart’s report, “China’s Support Programs for Automobiles and Auto Parts Under the 12th Five-Year Plan,” common imports include engine ignition coils, brake linings, glass windshields, radiators and aluminum wheels.

“In one sense, a ton of steel is consumed is a ton of steel consumed, whether produced in China or in the U.S., in terms of global supply and demand,” Aldrich says. “However, from a U.S. perspective, rising imports of steel-containing goods into the U.S. generally means less market opportunity for U.S.-based steel producers.” Aldrich adds U.S. manufacturers would rather see metal-consuming manufacturing increase domestically where U.S. steel is sold “versus seeing steel parts imported from abroad.” MM

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