China’s twist to steel scenario

SUSHIM BANERJEE
Tuesday, Jul 03, 2012
Financial Express
Last week, we discussed the impending changes in macro structure of Chinese economy in diminishing the role of asset creation and enhancing share of consumption. This shift in the pattern of management of the economy arises due to flattening of demand curve leading to excess capacity in a number of product lines with unabated income inequalities threatening the success factor of the model of economic growth. Basically, it would imply lesser emphasis on production of commodities whose consumption intensity is more investment-centric and steel happens to belong to this category.

In the first five months of the current year, crude steel production in China at 296.3 m/t has grown by only 2.2% over last year. This is reflected in lower imports of iron ore at 308.2 mt in Jan-May 2012 period and slower growth of indigenous production of iron ore concentrates at 475.5m/t during the period. With the slowing down of production, China’s steel exports reached 21.8 mt, almost similar level as previous year, while imports at 5.83m/t in the first 5 months gives credence to the fact that rate of growth of steel consumption is going down in China.

Recent reports show there is a surfeit of fake and spurious goods flooding shops and outlets in China to cope with the surging consumer demand. China known for mass production process is also encouraging modern warehousing to store and market goods of foreign origin to meet the retail demand. London Metal Exchange taken over by Hong Kong Exchange at a whooping sum of $2.2 billion has plans to set up warehouses in China for a variety of non-ferrous products like Copper, Zinc and others. Glencore, the global trading house recently merged with Xstrata at another big deal of $90 billion proposes to start warehousing facilities in China for iron ore for which both BHP Billiton and Rio Tinto have ensured supply. Glencore has the financial capability to combine small requirements, store them and meet small retail demand.

Global commodity prices, however, are exhibiting a downward trend. Crude oil prices with a band movement of $98-110 per gallon would give relief to large oil importers including India, neutralised partially by falling value of rupee. Coking Coal for July-September quarter settled at $225 per tonne is 7% more than the previous quarter’s level, but is likely to come down as demand for steel flattens. Iron ore prices at the current level of $138-140 per tonne are moving southwards and expected to touch $120/t in the coming months. This is more evident from the withholding of fresh investment for capacity augmentation for iron ore in Brazil and Australia by bulk producers. China’s economic strategies provide a twist to the scenario for raw materials in the coming months.

The author is DG, Institute of Steel Growth and Development. The views expressed are personal