Booming Chinese steel demand

Industry restructure key to productivity

’26-FEB-07 17:45′

JOHANNESBURG ( –Chinese steel demand will increase by 50 million tonnes (mt) annually, leaving a shortfall of 44mt in the supply of finished steel by 2007. As a result, the local industry is likely to consolidate to boost supply, as the Chinese central government has not identified the sector as a major investment area.

Chinese demand for steel will rise to more than 170mt by 2007 as the country continues to develop and uses both lower grade and high-quality construction steel in capital works programmes, said Dr Mergen Reddy, head of Deloitte Strategic Finance, in a recent report.

Significant demand will also come from the advanced auto and maritime sectors, which call for higher value-added flat products. Markets for galvanised, stainless, coated and more complex processed steels are also expected to grow faster, although China imports these products from countries such as Japan and the United States.

Chinese steel producers currently supply 87% of the domestic market, but the country is only in the early phases of burgeoning demand and steel demand could double in the coming decade.

This would occur even if new technologies such as bio-steel were introduced and the country managed to bypass some of the steel-intensive phases of development.

Higher productivity was unlikely as China had not only under-invested in the industry, but also focused on low labour input costs and not made significant improvements to processes. Enhanced productivity was one of the factors that could close the imminent gap between supply and demand.

“If these trends continue, China’s steel industry will not satisfy the country’s needs. “Beijing is gambling on the fact that continued deregulation and consolidation in the industry will be enough for improvement,” said Reddy.

The government believes that if the industry restructured, foreign and private capital would arrive and force productivity and efficiency improvements.

As multinational steelmakers are now developing global networks to capture large customers seeking to consolidate their suppliers, Chinese steel companies have to either consolidate the industry behind them or “piggyback” on the moves of Chinese appliance companies investing in assembly plants in the US and Europe.

Consolidation in the industry would lead to more efficient capital allocation and the manufacture of higher value-add downstream products, said Reddy.

“The industry could easily double production and satisfy internal demand for steel, provided China continues to open the steel industry, encourage the entry of private or foreign capital with its know-how and efficiency expectations and learn to move away from its low labour cost advantage.”

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