China Research

During the last fifteen years, Chinese crude steel production increased eightfold. But in 2015 the Chinese crude steel production will show a slight decline of around 2 per cent. Main reasons are less infrastructure investments and a lower demand from the construction sector. We estimate the overcapacities of the Chinese steel industry over the domestic demand of more than 250 million tons per year. As a result the Chinese exports of rolled steel products (flat and long) will climb up. During 2014, the total Chinese exports equaled around 93 million tons. For 2015 we expect a rise to around 135 million tons: nearly 9 million tons will go into the countries of the European Union while more than 50 per cent of the exports will be delivered directly to the Asian neighbor countries, another 10 per cent to the Gulf region and around a sixth to the Americas.

An important question is why China could sell its steel products on such a low-price level. First, prices for the raw materials iron ore, coking coal and steel scrap declined during the last year. As a result the producer costs came down. Second, the depreciation of the renminbi cheapened the Chinese steel exports beginning from the third quarter 2015 onward. But does it make sense to export even in case that 11 from 15 of the leading Chinese steel producing companies generate losses during the first half of 2015? In our view, the number of Chinese loss producing companies will increase in the second half of 2015. An important point is that in some provinces the steel exporting companies get subsidies for exports which compensate them partly or fully for their losses.

But will China now reduce its crude steel production or hold it on such a high level even in the future? We expect that China will stabilize the steel production on the current level and ramp up its exports even with losses for the steel producers. But what is the reason behind this on a first appearance economically abstruse behavior? In our point of view, there exists a political and a social misdemeanor behind the export and production activities of the Chinese steel producers. They often do not act independently from the political management in China.

The Chinese steel producing companies belong to the leading employers in many provinces. Even when they are privately or in majority privately owned, the province governments delegate a high responsibility for full employment in the region to them. If they are state-owned, there exist sometimes directives for high-employment levels. The provincial government by itself has an own interest in high employment levels in the region.

On the one hand, full employment or nearly full employment generates high income in the region and result in higher standards of living. In the internal ranking with other province politicians, the “helpful” province government improves its relative position and this enables them for further career leaps. If the people in a region are employed and have a higher standard of living, this will normally result in political calmness and social harmony in this part of the country. And the political calmness and social harmony secures the political survival of the provincial political leaders. On the other hand, if a province is politically instable because of unemployment, population movements and social unrests, the political careers of the members of the province government will end very quickly.

But currently the Chinese steel industry behaves very cautiously and helps to secure social harmony and economic stability. The overcapacities in the steel production lead to further rising exports which means that the Chinese problems with the huge volumes of steel production will be exported to other countries. We expect therefore that anti-dumping measures will be the answer to this Chinese behavior by both NAFTA the European Union.

 

 

 

 

 

 

 

Dr. Heinz-Jürgen Büchner
Managing Director Industrials, Automotive & Services
IKB Deutsche Industriebank AG, Frankfurt

 

 

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