Metal Expert
China Export in Focus
November 2016
Metal Expert in Focus
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Metal ExperM
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in Fo
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Iran Perspective
breathe new life
Nuclear deal to
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Iran’s export pote
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Square Billet in
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August 2015
scrap in Turk
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steel making”
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6
CONTENTS
Beijing unlikely
to cancel VAT rebate
on exports
EDITORIAL
Long-term efficiency of
Chinese exports questionable
6
After entering square billet to the
export-product list the Chinese started
raising steel product shipments to foreign
markets at a much higher pace,
but the shares of the other key products in
the supply structure have almost
not changed.
Effect from trade
restrictions against China
to intensify in 2017
therefore huge exports causing negative
response abroad are making Beijing play a
double game. Specifically, the ruling Party
has to show the whole world that they are
working on restraining export shipments,
but also keep local steel industry alive.
China’s overseas investment
programme
at initial stage
Despite analysts’ expectations of a further
to show the growth signs amid stronger
construction and automotive sectors this year.
12
The Asian tigers, Japan and South Korea
in particular, have long been following
the strategy of establishing steelmaking
production abroad. However, China is just
about to start pursuing the path. Now the
“going out” programme consists largely of
companies’ announcements rather than
actual moves.
Steel mills shutdown just
begins20
Plants find ways to survive
even without bank loans
Metal Expert
2016 construction boom to
give short-term support
34
Taxation reform to affect
construction activity
36
MPI: drop in steel demand
in long-term perspective is
normal38
SUPPLY & CAPACITY
Automotive industry remains the only
sector in China showing stable growth
even despite anticipated slowdown.
So, many Chinese steelmakers are
expanding their auto steel production
capacities. Nevertheless, the number
of new projects strongly exceeds
the pace of domestic consumption rise.
Steel consumption better than
expected in 2016
30
17 decline of steel demand in China, it started
9
Trade restrictions, introduced in 2016
against the influx of Chinese steel export,
have not yielded expected results yet.
They managed to stop just around 5%
of the total volume shipped last year.
However, trade measures may become a
more serious problem for China in 2017.
Expansion of auto steel
capacity to drive exports up
15
4 China’s steel market oversupply and
EXPORTS
Square billet still key driver
for export expansion
CONSUMPTION
RAW MATERIALS
Soaring coking coal hit mills’
margins40
Prices for Australian coking coal have
almost tripled compared to this year’s low,
reaching $215-231/t FOB, a record high
over the past three years. The fact could not
help but affect margins of Chinese mills, the
major consumers of the material, and make
them struggle for survival again.
Iron ore expansion nears
finishing line
42
22
Steel output stays unchanged
after environmental
inspections25
Consolidation not cure for
steel industry for near term
27
China Export in Focus | November 2016 | 3
EDITORIAL
Long-term
efficiency of
Chinese exports
questionable
Global steel markets’ high dependence on
the situation in the metallurgical segment
of China, particularly on Chinese exports,
became a norm long ago.
The significant presence of Chinese
steel products was originally registered
in overseas markets back in 2007, before
the financial crisis, when export volumes
exceeded 67 million t. Chinese producers
managed to surpass this mark in 2014
when shipments surged almost to 94
million t. This was, however, a forced
decision, as the central government
started to scale down its anti-recessionary
stimulus programmes, which resulted
4 | China Export in Focus | November 2016
in a slowdown of domestic steel
consumption. The Chinese steel industry
was completely unprepared for this. As a
result, Chinese exports reached an alltime high of 112 million t in 2015, and this
year’s volume is expected at least not to
be lower.
Higher export volumes from China show
the steel sector’s inability to cope with the
crisis of overcapacity. For now, producers
have managed to stop the growth of steel
production but failed to adapt to new
realities of consumption in the domestic
market. The value of the matter is more
than 100 million tpy of steel products.
Metal Expert
editorial
The Chinese authorities are well aware of
the problem. The programme to reduce
capacities by 45 million tpy is already
80% complete over the nine months 2016.
However, the actual steel production over the
period not only did not decrease but gained
0.4%. It appeared that it is easier to revive the
stimulus programmes rather than implement a
full-scale restructuring of the sector.
Being highly dependent on steel exports,
China is striving to supply downstream
products. However, due to the volumes
supplied as well as aggressive pricing of
Chinese suppliers, the developed countries,
which are the key consumers, have started
to systematically restrict access to their
markets. Billet exports from China, where
actual prohibitive duties for these products are
in force, have been rising steadily for the past
few years – the material is shipped through
traders usually under the code of “ square
bars.” This year the billet share in China’s total
export steel volume will exceed 30%, Metal
Expert estimates. HR coils are yet another
commodity item, which is being actively
distributed in external markets, where the
material is chiefly used for further re-rolling.
The problem is that China’s export model
in the segments for square billet and HR
coils is not sustainable. Although the quality
Metal Expert
of Chinese material has been no longer
the key obstacle in talks over recent years,
the main challenge is Chinese suppliers’
unstable profitability caused by their low
competitiveness.
Besides, long delivery periods usually raise
risks for buyers of Chinese steel products.
Chinese companies have an advantage of
relatively new equipment and high technical
qualification of staff. However, manufacture
of upstream products requires steadily
low expenses rather than those features.
Since the Chinese steelmaking industry
is not fully vertically integrated, as that in
CIS countries, for example, it will be rather
difficult to secure the competitiveness of
exports in the long-term outlook.
Nevertheless, Chinese producers manage
to successfully redistribute export supplies
now and balance at a breakeven point.
The troubles, which Chinese companies
will face, will affect all the other producers
beyond China due to the immensity of the
issue.
Enjoy your reading,
Andrey Pupchenko
Deputy Managing Director
Metal Expert
China Export in Focus | November 2016 | 5
EXPORTS
Square billet still
key driver for
export expansion
Chinese steel exports were expanded with a new product in the past three
years – square billet being traditionally declared as bars was added to the
export-product list. After entering this segment the Chinese started raising
steel product shipments to foreign markets at a much higher pace, but
the shares of the other key products in the supply structure have almost
not changed. Moreover, amid export upturn new sales destinations have
appeared over the past years.
After the new niche was found, exports of
bars, customs code of which is used for
all billet volumes, went up 3.5-fold in
2013-2015, as customs statistics showed.
As a result, the share of the product in
overall steel exports increased from 14%
to 28%. The rise continues, with the 2016
share exceeding 30% of total shipments
from China. Chinese suppliers achieved
the increase mainly owing to sales to SE
Asia (Indonesia, Thailand, Philippines,
Singapore) and South Korea. These five
Asian markets receive 45% of overall bar
„„ THE SHARE OF BILLET IN OVERALL
STEEL EXPORTS INCREASED FROM 14%
TO 28%
6 | China Export in Focus | November 2016
exports from China. Other large sales
outlets for Chinese billet are the Middle
East and Africa. In Europe, the leading
consumer is Italy. Semis exports
skyrocketed as it is more reasonable for
buyers to import semis rather than
produce them.
Many of SE Asian steelmakers, including
integrated mills, switched to longs rolling
using Chinese billet and reduced own
steel melting, which helped them to cut
production costs and improve
competitiveness of finished steel. At the
same time, billet became one of the most
profitable products for Chinese suppliers
on the back of strong demand and large
sales. “I know that export volume of billet
by China’s top traders is equal to that of
other steel products taken together,” a
representative of a Shanghai-based
trading company told Metal Expert.
Metal Expert
EXPORTS
Apart from billet, bar exports also
include most of rebar volumes. “Square
bar, deformed bar and square billet are
shipped under one customs code,” a
Chinese trader commented to Metal
Expert. According to insiders’ estimate,
rebar accounted for some 5 million t of
31.4 million t bar exports in 2015. At the
same time, square bar supplies actually
are considered small.
HR coils and sheets is the second product
in terms of export sales in China, with
the share in foreign shipments reaching
13.5%. With its stable proportion to other
products, some changes of strategic
sales destinations have taken place over
the past years. In 2016, Pakistan comes
third as the importer of Chinese HR coils
and sheets, following traditional leaders
– South Korea and Vietnam. The only
local producer – Pakistan Steel – stopped
Metal Expert
„„ EXPORT VOLUME OF BILLET BY
CHINA’S TOP TRADERS IS EQUAL TO
THAT OF OTHER STEEL PRODUCTS
TAKEN TOGETHER
operations back last summer. As a result,
demand is mostly covered by Chinese
suppliers. “Our main sales outlets are
Pakistan and Vietnam. Last year we
started export trading partly targeting
these destinations,” a large producer of
HR coils and sheets that used to sell steel
mostly domestically till mid-2015 told
Metal Expert.
Besides, Italy has joined the top-5 of export
markets for Chinese HRC, according to
China Export in Focus | November 2016 | 7
EXPORTS
export statistics data over the 8 months of
this year. However, sharp increase will be
changed with almost full stoppage of trade
flow, as AD investigation against HRC from
China was initiated in EU in August.
As early as in H1 this year, Iran was one of
the largest importers of Chinese HRC, but
volumes have started to drop in H2. Until
recently Iran’s demand for 2 mm material
was covered by foreign suppliers, mostly
from China. Nevertheless, the situation
will change soon – 20% import duty was
imposed in the country from March 2016
and a large steelmaker intends to start
producing HRC of this specification.
The third product in China’s exports is HDG
(10.8%). The segment’s leaders are again
Vietnam and South Korea. However, after
Vietnam imposed preliminary anti-dumping
duty on coated steel imports from South
Korea and China in September, Chinese
suppliers may remain without their topbuyer. Philippines and Italy rank third and
fourth positions regarding Chinese HDG
imports, respectively. In Italy only local
and Chinese suppliers almost fully cover
skyrocketing demand driven by progress
in automotive sector. Imports of other steel
products, apart from bars, are limited in Italy
due to effective duties.
The share of wire rod in China’s exports
has been gradually sliding since 2013 (2
p.p. to 10%). This is naturally related to
appearance of square billet in China’s
export market. Some Asian re-rollers
ramped up capacity utilization being
able to book cheap Chinese semis. As a
result, some volumes of import wire rod
in Asia have been replaced with domestic
material. Nevertheless, Chinese wire rod is
still mainly imported to SE Asia (Vietnam,
Thailand, Philippines, Indonesia) and South
Korea.
„„ CHINA’S STEEL EXPORTS, BY PRODUCT, MILLION T
Product
Long products
Bar*
Wire rod
Rebar**
Sections
Flat products
HR coils and sheets
HDG
Plate
CR coils and sheets
PPGI
Pipes
Seamless pipes
Welded pipes
Total, finished steel:
2013
17.1
8.8
8
0.27
4.1
27.1
5.9
7.7
4.2
3
4.5
9.6
5.1
3.9
61.8
2014
30.9
19.2
11.4
0.2
4.6
43.7
12.8
10.2
7.1
4.64
6.4
10
5.3
4
93.8
2015
43.9
31.4
12.2
0.2
5.2
48.5
15.3
11.4
7.5
4.62
7.1
9.97
4.5
4.7
112.4
Jan-Aug 2016
31
23
7.8
0.14
3.5
32.3
10.2
8.3
5
1.8
5.2
6.1
2.9
3.2
76.35
Y-o-y, %
+14.5
+20.4
+0.4
+0.8
-1.6
+2.4
+5.2
+12.7
+0.2
-43.5
+12.7
+0.8
-2.7
+4.2
+6.3
* – alloyed rebar, square bar and billet are exported under one customs code. Rebar exports were at 5 million
t in 2015, insiders estimate
** – non-alloyed rebar only
Source: Metal Expert estimation.
8 | China Export in Focus | November 2016
Metal Expert
EXPORTS
Effect from trade
restrictions against
China to intensify
in 2017
Trade restrictions, introduced in 2016 against the influx of Chinese steel
export, have not yielded expected results yet. They managed to stop just
around 5% of the total volume shipped last year. In the end, China’s exports
this year will not be lower than last year. However, trade measures may
become a more serious problem for China in 2017.
Southeast Asia, the EU, India, the Middle
East, the US and Brazil have imposed
trade barriers against China this year.
The volume of steel, which has fallen
under restrictions this year, amounts to
17.3 million t, which is only 15% of the
total shipments made last year, according
to Metal Expert estimation. However,
after a closer look, it becomes clear that
some of those measures cannot fully stop
exports and others were implemented in
the second half of the year and will affect
shipments only in 2017. According to Metal
Expert estimation, the restrictive measures
implemented in 2016 will lead to a loss of
only around 6 million t or 5% this year of
China’s total exports in 2015.
The trade barriers in India and the Middle
East have had no significant impact on
shipments from China yet. A 5-6% increase
Metal Expert
„„ THE RESTRICTIVE MEASURES
IMPLEMENTED IN 2016 WILL LEAD TO A
LOSS OF ONLY 5% THIS YEAR
of import duty on most steel products in
Iran failed to limit shipments from China.
India, one of important markets for China,
has also tightened its protection policy this
year by imposing a minimum import price
from February and setting preliminary antidumping and safeguard duties on certain
flat steel products. “New measures will
help to limit shipments from China, but
will not stop it, this is for sure,” an Indian
trader, dealing with HRC import, told Metal
Expert. As some sources commented,
China Export in Focus | November 2016 | 9
EXPORTS
importers are still buying Chinese API
grade HRC products, as they are not
included in the AD list.
At the same time, measures imposed by the
EU and the US have turned out to be the
most effective. The EU imposed a final antidumping duty of 19.7-22.1% on CRC, which
has almost fully stopped exports from China
this year compared to 1 million t last year.
“We have changed the product and now we
are selling HDG to the EU. And one of our
sister company focuses on square bar
exports,” a major Chinese trader told Metal
Expert in late August. However, rumours
about antidumping investigation on coated
coils appeared in Europe in early October.
Besides, the EC on October 6, 2016,
„„ MEASURES IMPOSED BY THE EU AND
THE US HAVE TURNED OUT TO BE THE
MOST EFFECTIVE
10 | China Export in Focus | November 2016
imposed a provisional duty in the range of
65.1-73.7% on heavy plate from China and
13.2-22.6% on HRC. Total imports of these
products amounted to 2.9 million t in 2015.
Even though trade cases had no visible
effect this year, they may fully close the
European market for Chinese flats suppliers
next year.
In May, the USA imposed final tariffs on
CRC and coated steel of more than 200%,
which means Chinese suppliers will need to
find other market for around 1.4 million t of
these products or cut exports.
Next year, a loss of the Vietnam market will
have the most painful effect on China.
Vietnam imposed protective measures
against semi-finished and long products
(23.3% and 15.4%, respectively) in July and
against HDG (4-38%) in September. China
exported 4 million of these products to
Vietnam in 2015. After the duties were
imposed, imports started to decrease
rapidly. In particular, according to Chinese
customs data, in August 2016 export of
Metal Expert
EXPORTS
Chinese billet to Vietnam declined 235%;
HDG exports fell by 37%. “Vietnam
imported about 7% of Chinese GI last year;
of course, the influence is there. Customers
are still buying, but they focus on mills with
low anti-dumping duty rate,” a major
Chinese exporter said.
Considering steadily growing demand for
cheap Chinese steel from Southeast Asia
and South Korea, producers will manage
to keep exports high this year, reaching
the record of last year (112 million t). Steel
consumption in Southeast Asia, the major
market for China, will grow by 10 million t
from 2016 to 2018, according to SEAISI; it
will be covered mostly by imports as the
region lacks own integrated capacity. But
will it be enough to consume huge exports
from China in the coming years?
Although the restrictive measures
cannot reduce the volume this year, they
„„ ALTHOUGH THE DUTIES CANNOT
REDUCE THE VOLUME THIS YEAR, THEY
WILL CHANGE THE STRUCTURE OF
SHIPMENTS
will change the structure of shipments,
in downstream products particularly.
In the eight months of 2016, CRC exports
were greatly affected. According to
customs data, CRC shipments from
China fell by 43.5%. The impact on other
segments has been less significant, where
shipments are still gradually increasing.
At the same time, China can feel easy
regarding HRC, taking into account the
growing market of Southeast Asia,
where it can redirect the volume from
Europe.
„„ IMPORT LOSS FROM RESTRICTIONS FOR CHINA IN 2016*:
2.8 + 1.2
0.24 + 1.2
0.42
5.86
Loss from tariffs
imposed in 2016,
million t
0.5
0.24 + 0-0.6
0.42
1.16-1.76
3.9
1.3**
4
1.5
Major steel products
1.8
0
Seamless pipes, PPGI
Some kinds of steel bars and
wire rod, plates, CRC, sections
and semis
CRC, coated products
-
0.22
0.22
0.12
0.12
2.1
1.4
17.26
0.34
1.4
5.7-6.3
Region
Country
Product
Asia
Total:
Vietnam
Malaysia
Taiwan
-
EU
-
India
Middle East
and Africa
-
Semis and longs + HDG
CRC, rebar and wire rod
HDG, plate
CRC, rebar (high fatigue
performance steel), HRC, plate
173 kinds of products
Iran
Turkey
South Africa
Total:
USA
Total:
-
Import in 2015,
million t
* – excluding extension of trade measures implemented earlier
** – including expected decrease in plate and seamless pipes shipments in October-December
Source: Metal Expert estimation.
Metal Expert
China Export in Focus | November 2016 | 11
EXPORTS
Expansion of auto
steel capacity to
drive exports up
Automotive industry remains the only sector in China showing stable growth
even despite anticipated slowdown. So, many Chinese steelmakers are
expanding their auto steel production capacities. Most projects are managed
by local mills at the own expense, without foreign investment, and will
be put on stream in 2015-2017. Nevertheless, the number of new projects
strongly exceeds the pace of domestic consumption rise, so it will not take
long before China will be forced to raise auto steel exports.
12 | China Export in Focus | November 2016
Metal Expert
EXPORTS
In January-September 2016 car sales in
China rose 13% to 19.36 million t, with
the increase being even faster year-onyear, according to China Association of
Automobile Manufacturers (CAAM). These
positive results were achieved thanks to
reduced tax on cars with small cylinder
capacity from 10% to 5% from October
2015. Lower taxes will be effective for some
70% of new cars in China, CAAM data
show. Local car makers will benefit from
this to a larger extent. The trend will persist
in the near term. It is should be mentioned
that current y-o-y expansion in car sales far
exceeds CAAM’s forecast of 7% growth for
2016, Metal Expert learnt.
With the optimistic automotive sector
sentiments and higher sales in 2013 and
2014 (14% and 10% up respectively), many
Chinese steelmakers started working on
capacity expansion projects. According to
Metal Expert’s estimate, about 29 million t
capacities have been planned to come on
stream from 2015 till 2017, which is some
60% of current overall steel consumption in
China’s automotive sector. The three largest
projects are being carried out by Baosteel,
WISCO and Shandong Iron and Steel
without help of foreign partners. Earlier
most of the market was covered by JVs
between Chinese companies and foreign
giants, like ThyssenKrupp, NSSMC, JFE
Steel, POSCO, ArcelorMittal. And these JVs
used to be the first to develop capacity
expansion projects.
However, the market is not ready to accept
such hike in flats output. According to
MySteel, China consumed some 50 million t
of auto steel in 2015. Even if consumption
adds 7-15% more this year, which is the
highest possible rise expected by the
majority of analysts, this will correspond
just to 3.5-7.5 million t being at least 4-fold
Metal Expert
„„ MOST PROJECTS ARE MANAGED BY
LOCAL MILLS AT THE OWN EXPENSE,
WITHOUT FOREIGN INVESTMENT
below the size of new capacities. Chinese
suppliers surely plan to replace some
volumes of imports with their material, but
this will not be enough to sell all planned
quantities of new auto steel. Total imports of
CRC and HDG were slightly below 6 million
t in 2015, as Metal Expert has learnt. As a
result, steel output will dramatically exceed
steel product consumption in this sector
by end-2017.
Certainly, not all ongoing projects are
targeted at auto sector only. The largest of
them (for example, WISCO) include white
goods sector as additional sales outlet.
Nevertheless, these buyers can hardly give
strong support to steelmakers as demand
for the key white goods (refrigerators, air
conditioners, washing machines) started
slackening last year too.
Besides, longer-term forecasts for
automotive industry cause some concerns.
As lower tax on cars with small cylinder
capacity will be no longer effective from
2017, sales will rise at a slower pace or
even stabilize in the next two years. “2017
will be a very difficult year for auto industry,
probably no growth,” said Yale Zhang, CEO
„„ ABOUT 29 MILLION T CAPACITY IS
PLANNED TO COME ON STREAM FROM
2015 TO 2017
China Export in Focus | November 2016 | 13
EXPORTS
at Automotive Foresight. Similar scenarios
involving upturn in car sales followed by
a decline on lower tax were observed in
2009-2010.
in commercial segment. Quality flats
market can change as well. Baosteel
will launch its 9 million [crude steel] tpy
project in the near term. Moreover, there
is a reason why they have built new
facility near the port, so we will see their
steel in ASEAN very soon,” Tan Ah Yong,
Secretary General at SEAISI, told
Metal Expert. It is also expected that
some quantities of steel products
from WISCO’s new plant will be
exported too.
After all large-scale auto steel projects
are launched Chinese companies will
have to redirect some volumes to foreign
markets. “China eats away at flats market
share of Japanese suppliers, so they
faced 3 p.p. decline [to 20%] in total
imports last year. However, this happens
„„ EXPANSION FOR AUTO STEEL PRODUCTION IN CHINA IN 2015-2017:
Company
Baosteel*
Mill
Zhanjiang
steelworks
Partner
-
Province
Guangdong
Capacity
Start-up dates
6.9 million t
of flats
1 BF put on stream
in September 2015;
the rest was planed
to launch before
September 2016
Fangchenggang
Steel
-
Guangxi
8.6 million t
of flats
The first mill
(2.1 million t)
commissioned in
June 2015; 100%
capacity to be
achieved in 2017
Shandong
Iron & Steel*
Rizhao steel
China
Zhongchong
Group (Chinese
private investor)
Shandong
7.9 million t of
steel products
2017
Chongqing
Iron & Steel*
-
50% POSCO
Chongqing city
2.4 million t
of flats
2017
Baotou Steel
-
-
Inner Mongolia
1.5 million t
of CR steel
2016
Tangshan
Iron & Steel
CR No.2
-
Hebei
0.65 million t
of HDG
2017
Anshan
Iron & Steel
Kobelco Angang
Auto Steel
49% Kobe Steel
Liaoning
0.6 million t
of flats
April 2016
Anshan
Iron & Steel
Tagal
50%
ThyssenKrupp
Liaoning
0.45 million t
of flats
September 2015
Baosteel
BNA
NSSMC
Henan
0.42 million t
2015-2016
Total:
-
-
-
29.42 million t
-
WISCO*
* – auto sheets are the key products for the project, but supplies to other consuming industries
can be also made
14 | China Export in Focus | November 2016
Metal Expert
EXPORTS
Beijing unlikely
to cancel VAT
rebate on exports
China’s steel market oversupply and therefore huge exports causing negative
response abroad are making Beijing play a double game. Specifically,
the ruling Party has to show the whole world that they are working on
restraining export shipments, but also keep local steel industry alive.
Moreover, export sales secure foreign currency inflow and fill the budget with
exporters’ taxes.
Manipulations with partial VAT rebate on
exports have repeatedly helped to get this
task solved. It has been rumoured in China
for a few months that such rebates on
exports of square bars under the guise of
which billet has been exported over the past
years can be cancelled. Beijing’s official
position on this issue is that only finished
steel is to be sold abroad. 20% export duty
on semis is effective in the country.
Nevertheless, domestic investigation into
illegal billet exports launched this June is
yet to considerably restrain sales abroad.
Moreover, small traders and mills really
withdraw export offers unwilling to face
fines, while large suppliers are sure there
can be no serious changes in this business.
This means they will keep raising exports
with confidence.
“These investigations affect neither prices
nor exporters in any way. Fines issued for a
couple of traders are the most serious thing
Metal Expert
„„ DOMESTIC INVESTIGATION INTO
ILLEGAL BILLET EXPORTS LAUNCHED
THIS JUNE IS YET TO CONSIDERABLY
RESTRAIN SALES ABROAD
China Export in Focus | November 2016 | 15
EXPORTS
„„ FINES ISSUED FOR A COUPLE OF
TRADERS ARE THE MOST SERIOUS THING
THAT CAN BE EVER HAPPEN
that can be ever happen. Steel export fuels
China’s economy and brings much needed
foreign currency,” a representative of one
of the largest China’s trading companies
told Metal Expert. Many insiders believe
that partial VAT rebate on square bars
exports may be cancelled soon, but the
majority doubts that this will block the
access to export billet market. Traders
and steelmakers are sure that Beijing will
take a decision that would just modify this
business, but it will not stop or even reduce
semis exports.
Such confidence is supported by the
cancellation of VAT rebate on exports of
some boron-added steel products since the
start of 2015. Then and there, the market
was actively discussing possible changes
during the last three months of 2014.
There were many options of measures to
be taken. Besides, some exporters feared
that VAT rebate on all alloyed steel would
be cancelled, which could affect their
global positions dramatically and reduce
overall exports in 2015. However, after
the decision release, it became clear that
only partial VAT rebate on boron-alloyed
steel had to be cancelled. Moreover, HRC
exports were given a pass. As a result,
Chinese steelmakers replaced boron by
chrome or other chemical elements in
some cases, and continued supplying
excessive steel tonnages to the global
market. Steel product exports from China
rose 20% last year reaching an all-time
high at 112.4 million t.
As a result, the Chinese market insiders
have serious doubts as to rumoured
cancellation of VAT rebate on square bar
exports. “To suspend export shipments
of any steel products is disadvantageous
for Beijing. So, they [the government] are
unlikely to do it,” a Tangshan-based trader
said.
„PARTIAL
„
VAT REBATE ON ALLOYED
STEEL EXPORTS FROM CHINA*
Product
Sections
Wire rod
HRC**
HR sheets
Bars
Rebar
CRC
HDG
PPGI
Plate
Rebate, %
9
9
9
13
13
13
13
13
13
13
* – excl. boron-added products
** – on exports of alloyed steel, including boron-added products
16 | China Export in Focus | November 2016
Metal Expert
EXPORTS
China’s overseas
investment
programme
at initial stage
The Chinese authorities announced they would support companies that
establish steelmaking production abroad as inside the country there is
chronic overproduction. The Asian tigers, Japan and South Korea in particular,
have long been following the strategy. However, China is just about to start
pursuing the path, which seems to be much more difficult. Now the “going
out” programme consists largely of companies’ announcements rather than
actual moves.
In late April the Central Bank of China
announced it would support local
companies by granting them credits and
project financing when “going out.” Over
the first nine months of 2016 China’s direct
overseas investments jumped by 53.7% to
RMB 883 billion (around $134 billion), the
Ministry of Commerce reports. M&A deals
accounted for slightly more than half of the
volume ($67.4 billion), which exceeded the
total figure last year. However, the share
of investments solely into the steel sector
abroad is so far extremely small
as the major stress is put on the
agricultural business and various steel
consuming industries such as
mechanical engineering and railway
track construction.
Metal Expert
China Export in Focus | November 2016 | 17
EXPORTS
In China, only state holdings used to invest
into foreign capacities until now. “We have
no intention to expand capacities abroad
as it is too risky considering policy in each
country and so on. Besides, production
costs may be higher than in China,” a
representative of the largest Chinese private
holding Shagang Group commented.
Difficulties in project implementation make
companies abandon them halfway through
or even at the very beginning, so the
number of completed or probable projects is
very small, while the announcements are
numerous.
China has chosen Eastern Europe, Africa
and Southeast Asia as the key regions
„„ DIFFICULTIES IN PROJECT
IMPLEMENTATION MAKE COMPANIES
ABANDON THEM HALFWAY
18 | China Export in Focus | November 2016
for investments, with the most successful
injections being made in Europe so far. The
largest state holding Hebei Iron & Steel
bought out a trading company Duferco in
2014 and Serbia’s Zelezara Smederevo in
early 2016. The latter under the supervision
of the Chinese investor is now stepping up
production and plans to reach the projected
capacity of 2.1 million t in 2018 (875,000 t in
2015). Investments into the plant were due
to its relatively low cost ($52 million) and
absence of extremely large debt obligations,
which may have been passed to a new
owner. Currently there is information that
Hebei Iron & Steel is interested in buying a
Slovakia-based steel plant.
Chinese companies’ projects implemented
in other parts of the world are at the early
stages. China’s largest investment in Africa
is that of Hebei Iron & Steel to construct a 5
million t mill in South Africa. The main
reason behind the decision is rising
consumption of import steel products in the
country. “There’s no guarantee that the cost
of building steel plants in Africa will be lower
Metal Expert
EXPORTS
than building them in China, but it makes
sense from cutting oversupply, a strategic
point of view and in terms of cooperation
with Africa,” WSJ reported citing Huachuang
Securities steel analyst Li Bin.
Chinese companies try to expand their
presence in Southeast Asia, where demand
for steel products is picking up, with no
major success so far. Shougang Group,
one of the Chinese TOP-10 steelmakers,
became an investor for the 3 million tpy slab
plant Eastern Steel (Malaysia). The facility
suspended operations in Q4 2015, just
9 months after the commissioning, due to
high operating costs and low prices in the
global market. Eastern Steel is currently
seeking to obtain funding from another
Chinese company (Angang Group Hong
Kong, wholly owned by China’s Ansteel
Group) in order to resume production.
The Philippine project of the major Chinese
re-roller Panhua Group (600,000 t of coated
flats), with construction scheduled for 2014,
was cancelled due to “bureaucratic issues
with the local government which lasted for
six months,” Metal Expert has learnt from a
company representative.
China continues making efforts to expand
its presence in Southeast Asia despite
the difficulties. In August Hebei Xinwuan
Steel Group and MCC Overseas received
the permits from the Malaysian authorities
to conduct a preliminary feasibility study
for the project in Sarawak state. The
total steelmaking capacity is expected
to amount to 5 million t, and the range of
products will include CR flats, pipes and
long products. “The new mill will successful
start operations only if its end product is not
HRC, as even the largest local steelmakers,
such as MegaSteel, have suspended
production. It is cheaper to import feedstock
Metal Expert
„„ INVESTMENTS IN EUROPE ARE THE
MOST SUCCESSFUL SO FAR
even with duties included,” a Malaysian
trader commented to Metal Expert.
Indonesia, being the most attractive country
for Korean and Japanese investments, will
also host a number of Chinese projects, the
largest of which is the 5 million t integrated
steel mill of Anshan Iron and Steel Group.
This project was announced in the middle
of last year, and the details have not been
disclosed so far. This Chinese holding
earlier tried to construct a mill in the USA,
but encountered opposition from the
Congress.
South America has not been the highestpriority investment direction recently, after
Baosteel in 2010 and WISCO in 2012 were
forced to abandon their major projects
due to market changes and permit issues.
Nevertheless, in September this year
an agreement between the Maranhao
state authorities (Brazil) and China Brazil
Xinnenghuan International Investment Co
was concluded to construct a new 3 million
tpy long steel mill as a part of a large
investment package from China, which
includes other sectors as well.
As a result, for now the Chinese “going
out” strategy in the steel sector consists
of words rather than real actions. This
process is possibly complicated by desire of
Chinese companies to invest in construction
of integrated mills, while Japanese and
Korean companies mostly establish rerolling
capacities abroad, which are more timeand cost-effective.
China Export in Focus | November 2016 | 19
SUPPLY & CAPACITY
Steel mills
shutdown just
begins
Beijing has announced plans to reduce steelmaking capacities by
100-150 million t over a 5-year period, with 45 million t to be closed this
year already. However, the majority of market insiders doubt that this will
have any strong influence on steel output this year as most of the equipment
destined to shutdown is either inoperative and outdated or underutilized.
The head of National Development and
Reform Commission Xu Shaoshi has
announced Beijing’s plans for the 2016
steelmaking capacity reduction at 45 million t.
“I’m very confident that we can achieve the
targets,” he said in June. Now more than
80% of plan has already completed.
However, total steel production in the first
9 months increased by 0.4% year-on-year,
according to CISA.
It makes it clear that almost no effectively
operating facilities were closed. Market
insiders are sure that government’s
policy just improved sentiments in the
market and accelerated price rise, which
stimulated mills to produce as much as
„„ TOTAL STEEL PRODUCTION IN THE
FIRST 9 MONTHS INCREASED BY 0.4%
YEAR-ON-YEAR
20 | China Export in Focus | November 2016
possible, seeing better margins. “Too many
regulations, I think. If government does
nothing, market will make mills to decrease
production,” a major Chinese trader told
Metal Expert.
Some major state-run producers are
ready to shut down some of the subject
capacities on voluntary basis, following the
governmental policy. Hebei province, the
site for the largest number of steel mills
is to reduce steelmaking capacities by
14.22 million t this year. The state-owned
Hebei Group will eliminate 5.02 million t
steelmaking facilities in 2016-2017, as a
company spokesperson said.
The ambitious reduction plans have been
heard from Beijing for years, but in fact
just a small number of mills shut down, so
the confidence of many insiders in the new
short-term targets of the government was
undermined. Last year many steel mills
stopped production and were bankrupted,
but then price rally led to many re-opens
Metal Expert
SUPPLY & CAPACITY
during Q1 this year. So affect was
reduced to minimal level. Even if the
situation changes this year and the
government keeps its promise and
cuts steel capacities by 45 million t
with no chances to re-start production
later, the market will not be affected
much anyway.
So far the top-ten companies have not
reported a notable drop in production
this year. In April, Baosteel, the second
largest state holding, and Shagang Group,
a major private company, said they even
expect steel output to rise by 20% and
12%, respectively. A Shagang Group
representative told Metal Expert that even
if the company revises its steel production
programme, it will obviously avoid reducing
the figure y-o-y. This is because the
companies ramp up auto steel production,
completing expansion projects announced
several years ago. Maanshan Group’s 2016
„„ ALMOST NO EFFECTIVELY OPERATING
FACILITIES WERE CLOSED
production target amounts to 18,600 t,
according to its annual report, which is only
1% down y-o-y. WISCO’s main mill plans
an insignificant decline in steel production
as well – down 400,000 t to some
18 million t. Most other largest steelmakers
also do not intend to reduce production,
as margins are much more attractive this
year, than in 2015.
As a result, the government’s large-scale
plans for capacity reduction and mills’
willingness to implement these plans are yet
to influence the global market. In fact, the
process of significant shutdowns has only
just begun.
„„ STEELMAKING CAPACITY REDUCTION PLAN FOR 2016, MILLION TPY
Province
Hebei
Liaoning
Jiangsu
Yunnan
Hubei
Shandong
Zhejiang
Henan
Xinjiang
Total
Metal Expert
Cut
14.22
6.02
4
3.76
2.28
2.7
3.03
2.4
7
45.41
China Export in Focus | November 2016 | 21
SUPPLY & CAPACITY
Plants find ways
to survive even
without bank
loans
Credit contraction has become one of the China’s key tools in the struggle
against excessive steel capacities over recent years. Until now, however,
shutdowns caused by a lack of funds were just temporary. Smart Chinese
steelmakers proved that they have all chances to survive even without bank
loans, especially given that the market environment may lend unexpected
support.
Since 2008 it has been increasingly
difficult for steelmakers to obtain credits.
An influence of these restrictions became
noticeable in 2014-2015, when mills started
to stop production because of the lack of
funds. Haixin Steel’s bankruptcy was among
the first hotly-discussed market leaving.
Then the second private steelmaker after
Shagang Group had to stop operations
as it had failed to pay back a RMB 20 billion
($3.21 billion) credit to Minsheng Bank.
Besides, the company had debts to raw
materials suppliers and buyers of its
products.
Then Tangshan Songting Steel shut down
all of its BFs by November 2015. The
company used to be one of the largest
private HRC makers. However, it had to
22 | China Export in Focus | November 2016
Metal Expert
SUPPLY & CAPACITY
leave the market too, being unable even to
purchase raw materials to feed facilities.
At the end of 2015 China was hit by a wave
of production stoppages. In JanuaryFebruary Beijing reported a success in
excessive capacity control. According to
different estimates, 40-60 million tpy
steelmaking capacities were stopped. All
those producers had one reason to shut
down – losses and huge unpaid loans.
Many of them failed to fulfil even prepaid
shipments to buyers and it seemed there
was no chance to come back to the
market. However, steelmakers started to
revive at the end of February-March.
Higher prices in the market, signs of better
demand (owing to Beijing’s monetary
policy) and higher profits allowed “zombie”
mills to find investors and restore their
positions.
Four companies, namely Tangshan Ganglu,
Tangshan Xinda Steel, Jiangyin Xicheng
Steel, and Baofeng Steel, having a total
capacity of some 20 million tpy fell under
complete financial control of the stateowned giant AVIC. The holding’s subsidiary
AVIC Steel International started granting
loans to these producers after they became
unable to obtain credits with banks. Later
it financed equipment re-start to allow
producers to pay off debts. As a result,
AVIC Steel became nearly an owner of four
steel facilities without buying any shares,
receiving payments for their products
directly from clients. Following this episode,
Tangshan Songting also started resuming
operations – the producer reportedly found
a state investor.
Operations at the equipment of formerly
private company Haixin Steel were also
resumed after the plant known now as
Shanxi Jianlong Iron and Steel Holding
Metal Expert
„„ SIGNS OF BETTER DEMAND AND
HIGHER PROFITS ALLOWED “ZOMBIE”
MILLS TO FIND INVESTORS
merged into Jianlong Group. The latter had
to pay off RMB 3.7 billion ($560 million)
debts before the plant resumed operations
after a two-year break.
All these episodes are connected with
relatively large private integrated mills.
However, the majority of China’s non-state
steelmakers are small mills, usually rerollers. They depend on loans most of all
and are the first to face losses in the falling
market. Nevertheless, Chinese
businessmen manage to find ways out
even in this situation. This July a
Chinese business publication released
an investigation against four private
re-rollers in Shandong, whose owners
were relatives. They launched nonmetallurgical businesses for getting
loans to maintain coated flats production,
opening more than 30 such firms over the
past few years. According to published
data, such scheme brought some
RMB 3.5 billion ($530 million) in total as of
July 2015. “We think the figures are too
high, but the rest in the article is well
known. Just nobody spoke about it openly,”
a large Chinese trader commented
to Metal Expert.
„„ SOME SMALL MILLS LAUNCHED
NON-METALLURGICAL BUSINESSES FOR
GETTING LOANS
China Export in Focus | November 2016 | 23
SUPPLY & CAPACITY
Chinese steelmakers find different ways to
attract investors and funds for production,
but the key drivers are market and demand,
which are regularly bolstered by the
government. Despite numerous statements
„„ BUT THE KEY DRIVERS ARE MARKET
AND DEMAND
24 | China Export in Focus | November 2016
about giving up the monetary policy,
Chinese industry is stimulated by funds
injections artificially every year. As a result,
measures to reduce excessive capacities
are offset by simulated demand for products
of the same loss-making companies.
“Beijing should leave plants to work in the
free market. Non-stop control and so-called
support actually only aggravate the
situation,” one of the largest Chinese
traders told Metal Expert.
Metal Expert
SUPPLY & CAPACITY
Steel output stays
unchanged after
environmental
inspections
The Chinese government is again reporting stronger control over the reduction
of steelmaking capacities. Nevertheless, increasingly stringent environmental
inspections have not yet led to closures of steel plants and lower production.
Today, a full list of plants falling under the
overcapacity fight programme is already
approved. Totally, 45 million tpy is planned
to be shut down, of which 77% was
completed during eight months of 2016.
Nevertheless, it is now obvious that
environmental inspections, which are
considered to be one of the most promising
ways to get rid of excessive capacity in
China, are not bringing the expected results
and have nothing to do with the current
capacity reduction.
This is not related to the effectiveness
of such inspections. The point is that the
Chinese government is not ready to reduce
production actually. Instead, it is getting rid
of worn-out inefficient equipment, which
will not have a real impact on production
volume in China. At the end of June, the
government announced plans to reduce
production by 45 million tpy; and already in
the middle of July, the largest metallurgical
Metal Expert
„„ 77% OF PLANNED 45 MILLION TPY
WAS ELIMINATED DURING 8 MONTHS
OF 2016
provinces presented their specific plans
which included 73% of that volume.
CISA recently reported more than 80%
completion of the planned reduction. But will
the actual output decrease as a result? By
no means. China is only showing the world
community it is willing and trying to tackle a
capacity glut, but in fact, the problem exists.
China’s steel output has been growing every
month (in year-on-year comparison) starting
from March this year.
A new wave of environmental inspections,
which started at the beginning of this year,
China Export in Focus | November 2016 | 25
SUPPLY & CAPACITY
has not yet led to any plant closures. At the
same time, it is well known that the level
of air pollution exceeds the limit, whereas
violations of environmental regulations are
found at hundreds of steel plants. These
plants receive severe reprimands and fines,
but the production process is not disrupted
because polluting enterprises are providing
jobs and filling the local budgets. At the
same time, elimination of the so-called
„„ NONE OF THE PLANTS WAS
CLOSED AFTER ENVIRONMENTAL
INSPECTIONS YET
„„ SOME STEEL MILLS WERE FINED,
BUT REMAINED IN OPERATION
26 | China Export in Focus | November 2016
“zombie plants” does not have any negative
aftermath.
The year of 2016 was announced as the
environmental control year. Beijing should
have used environmental inspections to
close steel plants. “I think environmental
control is the best way [to fight
overproduction]. No one in the world can
ban legal money making for survival, but
if they [mills] contaminate the environment
for that purpose, they must be closed,” a
large Chinese trader told Metal Expert. It
does make sense. Moreover, Beijing can
resort to drastic measures when needed.
Chinese steelmakers can think of a number
of cases when plants that violated orders
of local authorities were isolated from
electricity and water supply. However,
none of the plants was closed after
environmental inspections yet.
In May 2016, the government stated that
steelmakers in 14 provinces would be
checked. The special groups went to mills
with inspections in June and July; in early
September, they reported violations. As
a result, some steel mills were fined, but
remained in operation. “Many of them
have just to upgrade their equipment, then
they will have no barriers to make steel
again. Some mills may even just promise
to decrease pollutions,” a large Chinese
trader told Metal Expert. Such results of
the inspections were quite predictable,
considering the January inspections in
Hebei province, which produced around
25% of China’s steel. 366 people in
total were brought to account: 125 of
them received fines, 123 administrative
arrests, 65 verbal warnings and 60 severe
reprimands. Yet, no plant was closed.
Moreover, many mills, closed back in 2015,
resumed operations in February-May due to
increased steel prices.
Metal Expert
SUPPLY & CAPACITY
Consolidation
not cure for steel
industry for
near term
The Chinese government intensified promotion of the steel sector
consolidation. The announcement of a merger of Baosteel and WISCO serves
as a good example for this. Restructuring may buoy the steel industry, as it
results in production cost cuts by major companies and smaller loss-making
mills dying, which will lead to lower steel production in the oversupplied
market. However, there are still too many barriers for the process. Market
participants doubt it will yield any positive results in the near future.
Late last year, China’s top 10 companies
accounted for just 34.2% of total capacity in
the country compared to 60% projected in a
5-year plan, according to Anshan Iron & Steel.
Moreover, this number even lowered from
2010, when the share of major steelmakers
was 48.6%.
In the middle of this year, news about
a new wave of consolidation appeared.
Baosteel Iron and Steel and Wuhan Iron
and Steel officially confirmed their merger
on September 20, which means a new
leader will appear in China’s steel industry
replacing Hebei Iron and Steel Group as
the largest producer. The companies will
create Baowu Iron and Steel Group. The
new leader will produce about 60 million t
Metal Expert
per year, according to estimate based on
2015 data.
The latest massive consolidation in Chinese
steel industry took place in 2008-2010,
when such steel giant as Hebei Iron & Steel
and Shandong Iron & Steel appeared. Many
projects were announced, but remained “on
paper,” like Anbeng Group, which is formally
a mother company of Anshan Iron & Steel
„„ LATE LAST YEAR, CHINA’S TOP 10
COMPANIES ACCOUNTED FOR JUST
34.2% OF TOTAL CAPACITY
China Export in Focus | November 2016 | 27
SUPPLY & CAPACITY
However, this year government’s desire
to consolidate industry looks like more
serious. The government will announce a
consolidation plan of Anshan Iron & Steel
Group (Ansteel Group) and Benxi Steel
Group by the end of the year, local media
reported, citing a representative of China
Iron & Steel Association. However, Ansteel
Group denies the information about a
merger in the press release.
and Benxi Steel, but which has no actual
impact on their operation. On the one hand,
these are consequences, not consolidation
itself, that are evoking resistance of the
local authorities. It will lead to massive layoffs. “Mergers don’t always lead to gains
in efficiency. For example, Tonghua Steel
was bought by a private company. It is now
owned by a state giant, Shougang, which
is moving slowly to lay off employees, but
it will not be an easy process,” Andrew
Collier, an analyst of the Chinese market
and managing director of Orient Capital
Research, told Metal Expert.
„„ THE GOVERNMENT WILL ANNOUNCE
A CONSOLIDATION PLAN OF ANSTEEL
GROUP AND BENXI STEEL GROUP BY THE
END OF THE YEAR
28 | China Export in Focus | November 2016
Last year, Benxi Steel Group and Ansteel
Group were ranked third and fourth largest
loss-making steel mills in China. The
government’s desire to finish eventually
the merger is reasonable as it can help
both companies cut costs and improve
their financial results, market sources say.
“Ansteel has about 80,000 staff [not only
steel division], which is well above the
normal level. Shagang Group has similar
production capacity, but its staff is smaller
– less than 20,000,” China’s large trading
company told Metal Expert, commenting on
the necessity of consolidation. Total steel
output of the two companies was 46.57
million t in 2015, which is just 1 million t
below the production of China’s current
largest holding Hebei Iron and Steel Group.
Chi Jingdong, vice chairman of China
Iron & Steel Association, said that this
consolidation “would be the government’s
top priority after the restructuring between
Baosteel and Wuhan Steel Group [WISCO].”
The central government allocated RMB 100
billion ($15 billion) to find work for 1.8 million
people, of which 500,000 will be laid off in
the steel sector. However, the process will
take much more time, than it is expected,
as there is no established model of training
employees for the service industry, which
is the most promoted industry by the
government recently.
Metal Expert
SUPPLY & CAPACITY
Although Baosteel and WISCO merger,
which will be the largest one in steel
industry over the recent years, promotes the
numerous lay-offs (mostly at WISCO),
production will not decrease. This will be
related to a launch of new facilities
(15-16 million tpy of finished steel in total)
by both companies along with
decommissioning of outdated capacities.
“Having agreed on consolidation,
Baosteel secured governmental loyalty
for their business,” a Chinese trader
told Metal Expert.
The consolidation of such large companies
may favour the industry, since it may result
in a closure of smaller plants, in particular
in the Hebei province hosting WISCO’s key
operations. However, it is too early to speak
of benefits.
Small plants being on the verge of
bankruptcy can win the most from the
merger process. In early 2016 a large
state-owned company AVIC got under
its financial control four producers
(about 20 million t in total) and secured
flawless operations at their sites, since
buyers confidence improved. However,
this is one of very few examples
in China so far.
„„ ALTHOUGH BAOSTEEL AND WISCO
MERGER PROMOTES NUMEROUS LAY-OFFS,
PRODUCTION WILL NOT DECREASE
As for the companies planning
consolidation, the second largest private
holding in China – Jianlong Steel – stated
this May that it intended to expand its
nominal capacities from 23 million t to
50 million t via acquisition of smaller
businesses. Jianlong Steel moved up
from rank 12 to rank 10 in terms of steel
output in China since 2015, while many
large holdings posted weaker production
performance over a year.
Another candidates for consolidation were
believed to be Shougang Group and Hebei
Iron & Steel. However, CISA did not confirm
rumours about this combination, which were
circulating in the market during three months.
The majority of insiders agree that the
consolidation may save the Chinese
metallurgical industry, provided the industry
itself gets more effective, but this process
will take time.
„„ CHINA’S TOP-10 COMPANIES BY CRUDE STEEL OUTPUT IN 2015
Name
Hebei Iron & Steel
Baosteel Group
Shagang Group
Ansteel Group
Shougang Group
Wuhan Iron & Steel Group
Shandong Steel Group
Maanshan Steel
Tianjin Bohai Steel
Jianlong Group
Production, million t
47.75
34.94
34.21
31.58
28.55
25.78
21.69
18.82
16.27
15.14
Source: CISA.
Metal Expert
China Export in Focus | November 2016 | 29
CONSUMPTION
Steel consumption
better than
expected in 2016
Despite analysts’ expectations of a further decline of steel demand in China, it
started to show the growth signs amid stronger construction and automotive
sectors this year.
In 2014, steel demand in China contracted
for the first time since 1995 driven by a
slowdown in the economic growth of the
world’s second largest economy and “due
to the government’s rebalancing efforts
that had a major impact on the realestate market,” according to the World
Steel Association (WSA). The drop in
consumption in 2014 was 3.4%, and was
followed by a decrease of 4.6% to 705
million t in 2015, according to CISA. Major
steel associations predicted further fast
decline. WSA forecasted a decrease of 4%
and 3% in 2016 and 2017 respectively.
However, the trend was reversed in July,
when apparent steel consumption went up
by 2.1% y-o-y. In September, demand
continued to increase (by 8.3% compared to
„„ THE TREND WAS REVERSED IN JULY,
WHEN APPARENT STEEL CONSUMPTION
WENT UP BY 2.1%
30 | China Export in Focus | November 2016
September 2015), with a year-to-date
number being still 1.3% below the previous
year. The pace of the decline slowed down
significantly though over the past three
months. In January-June, the difference
was -4.2% year-on-year. With an
improvement of construction activity, an
increase in automobile output and a stable
growth expected in machinery sector this
year, steel consumption in China may
exceed expectations. In September, CISA
revised its forecast regarding the country’s
steel use in 2016 from -3% to the decrease
of less than 2%. Some market participants
even believe that it will not decline this year.
Investment banking firm Goldman Sachs
forecasted a slight increase of 1% for this
year. Till now “China domestic demand is
quite good, especially [from] big projects
arranged by the government focused on
foundation construction,” a Chinese trader
told Metal Expert late in August.
Stronger construction sector, which
accounts for more than 50% of steel use in
China and was the main reason for a drop
in steel use in 2015, was a major driver this
Metal Expert
CONSUMPTION
year. With surging yuan loans and
increased investment in the sector, new
home construction also accelerated.
According to China’s National Bureau of
Statistics, the space of new houses under
construction in January-August was 1.068
billion square m, 12.2% above the same
period of last year. This illustrates a trend
reversal, as last year new starts fell 14%.
A threat of a decline of construction is
looming even now. Fitch Ratings released a
warning regarding housing in China, saying
that the country’s strategy to increase
construction activity in less-developed
cities will aggravate credit problems of the
developers, therefore reducing investment
Metal Expert
„„ CISA REVISED ITS FORECAST
REGARDING THE STEEL USE IN 2016
FROM -3% TO LESS THAN -2%
to the sector. Moreover, Chinese authorities
have started implementing a number of
measures to restrain an increase in housing
prices in overheated market.
In machinery, which accounts for about
20% of the country’s steel consumption, the
situation is more stable, though the industry
was also showing signs of weakness. In
China Export in Focus | November 2016 | 31
CONSUMPTION
2015, the increase in value-added output (in
money terms) of the sector was only 5.5%,
much less than expected 6.9% and 10%
registered in 2014. This year the increase
is predicted to remain at 5.5%, according
to Wang Ruixiang, president of the China
Machinery Industry Federation (CMIF),
so no reduction in steel consumption is
expected.
At the same time, the expectations for
machinery are not optimistic, as demand is
weakening and investment into the sector
is decreasing. “The slower-than-average
growth rate in the machinery sector is very
unusual and it highlights the difficulties the
industry’s facing,” Chen Bin, CMIF executive
vice president said.
The growth of the automobile industry
declined sharply in 2015 (to 3.3% compared
32 | China Export in Focus | November 2016
to 14.8% in 2013 and 7.3% in 2014), but a
recovery is expected in 2016. CAAM
expects to nearly reach the growth of 2014,
predicting a 7% increase in total car sales to
26 million units this year. The figure can
even be higher, as in January-September
production increased by 13.3% compared to
the same period of 2015. “Automobile steel
sales went very well in China, and more
profitable [than in 2015],” a Chinese trader
told Metal Expert.
In the following years, the growth in
car production and steel consumption
will slow again, as lower tax on cars
with small cylinder capacity, imposed
in October 2015, will expire next
year, affecting car sales. Moreover,
China Association of Automobile
Manufacturers warns that “automobile
structural overcapacity problem has
Metal Expert
CONSUMPTION
appeared,” adding that there is a need
to give attention to different aspects like
controlling investment in the sector and
developing new technologies in order to
avoid a market collapse.
The situation in other consuming
industries, shipping in particular, is worse.
“China’s ailing shipbuilding sector is
expected to face a tougher year in 2016
due mainly to the continuing supplydemand imbalance in global shipping
and newbuilding prices likely to decline
further,” according to China Association
of the National Shipbuilding Industry
(CANSI). However, the expected reduction
of 2% y-o-y in ship construction cannot
offset the positive results in housing,
machinery and automobile, which together
accounted for about 81% of China’s total
steel use in 2015.
„„ AUTOMOBILE STEEL SALES
PERFORMED VERY WELL IN CHINA,
AND WITH HIGHER PROFIT
COMPARED TO 2015
Still, during the next few years, Chinese
steelmakers are expected to face a drop
in demand from domestic consuming
sectors and will be forced to either reduce
production or send the excess volumes to
the export market. As Chinese steel output
in January-August reduced by just 0.1%
to 536.32 million t, while exports remains
high despite a decrease in August and
September, China seems to prefer the
second scenario.
„„ STEEL CONSUMPTION IN CHINA BY INDUSTRY*
Construction 54%
Machinery 19.6%
Automobile 7.5%
Energy 4.8%
Shipping 2%
Home appliance 1.6%
Container building 0.8%
Rail 0.7%
Other 9%
* – China Metallurgical Industry Planning and Research Institute, 2015 year data
Metal Expert
China Export in Focus | November 2016 | 33
CONSUMPTION
2016 construction
boom to give
short-term support
The H1 construction boom in China lent strong support to domestic steel
consumption and moved the rates almost out of the negative territory,
coming as a surprise for many insiders who expected the plunge to continue
in 2016.
Construction segment consumes more
than a half of steel volumes in China, so
its weakening was the factor to cause a
collapse in the domestic steel market in
2015, when apparent steel consumption
fell 4.6% in China. However, the situation
changed dramatically early this year.
China’s monetary liberalization policy
under which the January yuan loans
jumped 320% and 71% m-o-m and y-o-y
respectively, along with stimulus measures
for the real estate market since the end of
2015 has brought positive results, while
back in H2 2015 analysts were more
modest in their expectations. According to
„„ CHINESE BUYERS RAISED PROPERTY
PURCHASES, WHICH LED TO A 25.5%
INCREASE IN COMMERCIAL BUILDING
SALES
34 | China Export in Focus | November 2016
the National Bureau of Statistics (NBS),
Chinese buyers raised property purchases,
which led to a 25.5% increase in
commercial building sales over 8 months
as well as a price hike in the property
market – revenue rose 38.7% y-o-y. As a
result, this improvement had positive
impact on construction of new houses, the
key factor influencing construction steel
consumption in the country. The rate
increased 12.2%, against a 14% decline
observed for the whole last year.
The steel market responded immediately
– domestic demand for steel products
started strengthening. Apparent steel
consumption rose 4.2% y-o-y in August,
Metal Expert estimates considering the
recent NBS data and customs statistics. In
January-August 2016 the rate decreased
just 2.4%, but insiders mostly reported
that real demand was higher. “The number
of orders from machinery and construction
sectors spiked over the past few months,”
a representative of a large trading
company commented.
Metal Expert
CONSUMPTION
Nevertheless, construction sector’s long-term
support for domestic steel consumption is
very doubtful given diversity of China’s
property market: the situation in first and
second tier cities in China is much better
than in smaller ones. At the same time, third
and fourth tier cities have accounted for 8090% of new construction volumes over
recent years, as said analysts in
Commonwealth Bank of Australia. This
means that demand just from these regions
directly influences construction steel
consumption in the country. After Beijing’s
stimulus packages, sales and prices in the
largest cities skyrocketed, raising concerns
about housing shortage, while the increase
in the smaller cities was moderate, while
property availability remained high. According
data from NBS based on 70 cities of China
divided into three groups, an average upturn
in prices in the first group including the
biggest cities was 27-29% over a year in July,
compared to 2-4% in the third one.
As a result, even despite a decline from
end-Q1, housing inventories remain quite
high. “China’s property sector is extremely
unbalanced, which leads to more control
in overheated first and second tier cities
while less developed third and fourth tier
cities are struggling to clear inventory [of
unsold property],” reported Reuters, citing
Liao Qun, chief economist at CITIC Bank
International.
„„ THE SITUATION IN FIRST AND
SECOND TIER CITIES IN CHINA IS MUCH
BETTER THAN IN SMALLER ONES
With the government targeting reduction
of unsold property inventories rather
than a price boom, Beijing’s support for
construction sector has softened and the
upturn in the real estate market is slowing
down. Property investments rose 7% over
January-May, while in January-August the
increase was 5.4%.
Although long-term forecasts for the
construction market mostly suggest
stable industry development, it will be not
enough to keep supporting steel demand
rebound. Fitch Ratings said that China
must build residential units 800 million sq
m in area in total or as large as Singapore
every year till 2030 to cover domestic
demand. Nevertheless, this is 2-fold below
the pace of new housing construction in
China now.
Despite a gradual steel consumption growth
this year, market insiders believe the rate
will be stable at best next year, which
with high steel output will keep making
steelmakers sell excessive volumes abroad.
„„ CHINA: PROPERTY MARKET IN JANUARY-JULY 2016
Sector
Investments in real estate
Sales of commercial buildings,
floor space (sq m)
Sales of commercial buildings (RMB)
Housing inventories, floor space
New construction starts
8 months ’16
RMB 6.438 trillion
Y-o-y
+5.4%
8 months ’15
RMB 6.106 trillion
Y-o-y
+3.5%
874.5 million
+25.5%
697 million
+7.2%
6.662 trillion
708.7 million sq m
1.068 billion sq m
+38.7%
+6.9%
+12.2%
4.804 trillion
663.2 million sq m
952 million sq m
+15.3%
+18.1%
-16.8%
Source: National Bureau of Statistics.
Metal Expert
China Export in Focus | November 2016 | 35
CONSUMPTION
Taxation reform to
affect construction
activity
Beijing has implemented a taxation system reform in 2016, which will have
the biggest impact over the past 30 years. However, unlike the service market,
the construction industry and property market will feel negative influence of
the changes, which may put pressure on steel consumption.
From May 1, business taxes on construction
and real estate (3% and 5% respectively)
were replaced with 11% VAT. Although the
calculation basis for VAT is lower, higher
payments will not go unnoticed by these
sectors. “The real estate and construction
industry has historically been the sector
which has contributed the most amount of
BT revenue to the government. It is also the
most economically sensitive sector affected
by these reforms, especially because the
VAT rates for the real estate and
construction industry are substantially
higher than the current BT rates,” reported
auditor and advisory firm KMPG. The
measures that could ease the impact
„„ BUSINESS TAXES ON CONSTRUCTION
AND REAL ESTATE (3% AND 5%
RESPECTIVELY) WERE REPLACED WITH
11% VAT
36 | China Export in Focus | November 2016
include application of VAT only to building
construction started after May 1; exception
of some expenses from tax entities (e.g.
costs of land title purchase); no VAT on
buildings being on sale for more than 2
years.
Despite the easing measures, the
construction sector will face an increase in
payments anyway. Construction of new
houses decreased 10% m-o-m in August,
which is related to seasonal downturn and
new taxation system. At the same time,
many companies, unwilling to pay higher
taxes, were in a hurry to start activities
before May. In January-April 2016 the
construction area of new buildings
increased 21.4% posting a record upturn
over the past few years, but in JanuaryAugust the rate slowed down to 12.2%. The
construction sector consumes about 55% of
overall steel volumes in China, according to
Metal Expert’s data.
Beijing’s moves generally correspond to
the strategy aimed at backing the service
Metal Expert
CONSUMPTION
sector and lowering the support to the
industrial one. Analysts at Credit Suisse
believe the service sector, distribution
and production of cars will benefit from
the reforms. With VAT launch, Chinese
companies will become able to save
RMB 500 billion (about $75 billion) per
year. According to a work plan released
on August 22 by the State Council, the
reforms will continue. The measures will
include not only lower tax burdens, but also
cheap financing and reduced red tape, as
well as more affordable land use, energy
consumption. At the same time, no mention
Metal Expert
„„ MANY COMPANIES, UNWILLING TO
PAY HIGHER TAXES, WERE IN A HURRY
TO START ACTIVITIES BEFORE MAY
of the metallurgical or construction sectors
was made. After the large cash injections
and stimulus packages for the real estate
market, which bolstered construction in H1
2016, the government does not seem to
introduce new initiatives anytime soon.
China Export in Focus | November 2016 | 37
CONSUMPTION
MPI: drop in steel
demand in longterm perspective is
normal
Although Chinese steel consumption showed signs of improvement in 2016,
the further trend leaves no doubt about regarding its downward movement
as China’s economy is slowing down. Still, China Metallurgical Industry
Planning and Research Institute (MPI) assume that, despite expected decrease,
demand for steel in the country will remain at high level.
During the 3rd Iranian Steel Export
Perspectives Conference held by Metal
Expert this month, MPI’s President Mr. Li
Xinchuang shared his view on long-term
perspective of steel demand in China.
According to Mr. Li’s presentation, steel
consumption will consecutively go down at
least till 2030. Having dropped from
702 million t in 2014, it will reach only
595 million t in 2020, followed by
552 million t and 492 million t in 2025
and 2030, respectively, the research
made by MPI “on the basis of down-stream
„„ HAVING DROPPED FROM 702
MILLION T IN 2014, STEEL CONSUMPTION
WILL REACH ONLY 595 MILLION T IN 2020
38 | China Export in Focus | November 2016
industries analysis and GDP consumption
intensity” showed.
Mr. Li’s opinion on downward movement of
steel use in China is shared by a leading
global investment banking firm Goldman
Sachs. The firm analysts forecast that after
a slight increase of 1% in steel demand this
year it will post a reduction of 2% both in
2017 and 2018. “The ongoing growth
deceleration and rebalancing away from the
old economy implies a secular downward
trend in steel demand,” Goldman Sachs’s
report says. Moreover, the company states
that steel use in China is less sensitive to
investment now than in previous years due
to a number of factors, so “we would need
to see ever-accelerating credit growth just to
maintain the same level of steel
consumption, which is unsustainable and
unlikely.”
Metal Expert
CONSUMPTION
Indeed, China’s Machinery Industry
Federation’s data showed that year-on-year
increase of fixed-asset investment in the
machinery sector, the second largest steel
consuming industry in China, was 3.07%
in H1 2016, which is the lowest level since
2008. Besides, although the investment
in the construction sector increased this
year, Chinese government has recently
started taking measures to curb lifting
prices for real estate. “I guess Chinese
steel consumption growth may decrease
[in the next few years]. After all, large-scale
infrastructure projects already stepped into
a stationary phase, unlike in previous five
years,” a Chinese major trader told Metal
Expert.
However, Mr. Li considers that current
situation in steel demand is a “new and
normal background of slow economic
development.” “The stable development of
traditional industries and thriving of new
Metal Expert
„„ DEMAND WILL POST A REDUCTION
OF 2% BOTH IN 2017 AND 2018
industries are expected to maintain China’s
steel consumption in a vigorous state for a
long time,” he added.
The steel consumption structure by industry
in 2015 was the same as in 2014, Metal
Expert learnt. Thus, construction remains
traditionally the biggest consuming sector
with a share of 54% (360 million t) in
the total volume of steel consumption.
Machinery’s share was 19.6% in 2015,
automobile sector’s – 7.5%, energy’s –
4.8%, shipbuilding’s – 2%. The shares of
home appliance sector, container building
and rail construction were 1.6%, 0.8% and
0.7% respectively, according to MPI.
China Export in Focus | November 2016 | 39
RAW MATERIALS
Soaring coking coal
hit mills’ margins
Prices for Australian coking coal have almost tripled compared to this year’s
low, reaching $231-240/t FOB, a record high over the past three years. The
fact could not help but affect margins of Chinese mills, the major consumers
of the material, and make them struggle for survival again.
40 | China Export in Focus | November 2016
Metal Expert
RAW MATERIALS
Similar to 2011 when prices surged
because of floods in Australia, this time,
the steep rise was due to short supply of
the material. First and foremost, it was
the Chinese government’s decision to
cut coal capacities inside the country
and curb mining to meet environmental
standards that urged prices to move
upward. The number of working days at
coal companies located in Shanxi province
has been reduced from 336 to 276 since
April. Floods in northern China in July also
resulted in interruptions to railway supplies
of local coal.
But declines in supply volume in China
were not as dramatic compared to the price
surge. In January-September coking coal
extraction in China decreased just by 1.6%
or 5.4 million t to 331.74 million t, according
to National Bureau of Statistics, with
imports over eight months of the year
gaining 5.5 million t, reaching 37.9 million t.
Not only lower production of the material
in China but also limited supply from
Australia has been affecting prices.
Technical issues with roofs at South32,
Anglo American and Vale’s mines together
with accident on Newlands Coal System
have been disrupting production and
sales since Q2. The latest force majeure
in early-October was declared by AngloAmerican on the Q4 laycans at its key
German Creek mine, due to problems with
roof, just again.
Apart from decreasing supply, the hike is
attributed to speculations from both
Australian producers and traders that have
been artificially boosting buying activity.
The situation in the domestic market only
proves this right. As of mid-October local
Metal Expert
„„ DECLINES IN SUPPLY VOLUME
IN CHINA WERE NOT AS DRAMATIC
COMPARED TO THE PRICE SURGE
prices for coking coal in China added only
33% since early August, while Australian
tags surged 113%, according to Metal
Expert. Even though many Australian
producers claim that they have no volumes
to offer, contracts are signed every week.
“Traders are reselling the same tonnages
spurring buying activity,” a source
commented.
The surge in coal quotes has affected
margins of mills in China, which had to
increase steel prices in a bid to mitigate
loses. “Production costs are much higher
now than before. We have a margin while
selling flats, but suffer losses in the longs
segment,” the head of a large steel mill
said.
But although some downward adjustment
in spot coking coal price is expected by
year-end, it will not be significant as Q4
benchmark contracts were signed at
$200/t FOB. “In the short term coal prices
will stay high, so margins will continue to
be pressured further on,” a mill source
commented.
„„ THE HIKE IS ATTRIBUTED TO
SPECULATIONS FROM AUSTRALIAN
PRODUCERS AND TRADERS
China Export in Focus | November 2016 | 41
RAW MATERIALS
Iron ore expansion
nears finishing line
The largest iron ore producers, whose capacity expansions coincided
with China’s slowdown, say new demand may be coming from emerging
economies such as Southeast Asia (SEA) and India both having immense
infrastructure development and steel capacity potential.
42 | China Export in Focus | November 2016
Metal Expert
RAW MATERIALS
Association of Southeast Asian Nations
(ASEAN) will need at least $110 billion per
year for infrastructure projects through to
2025, the ASEAN Investment Report shows.
Combined GDP of Indonesia, Thailand,
Malaysia, the Philippines and Vietnam will
total $3 trillion by 2020, as countries make
a huge leap towards modern transportation
and urbanization, with up to 50 million t
of new BF capacity announced to be
launched to meet new demand. This will,
of course, secure a strong consumption of
commodities.
India, already seen as the second China,
will see its steel production triple by 2025
in response to infrastructure and building
boom. According to the report published
by Australia’s Department of Industry,
Innovation and Science (ADIIS) this March,
in 2021 the country will cover 46 million t
of iron ore needs with imports as “the high
cost of [iron ore] production coupled with
output caps in the key producing regions.”
According to the recent presentation of
BHP Billiton, the third largest producer
in the world, China will raise steel output
by around 20% by mid-2020s owing to
manufacturing sectors such as machinery
and transportation.
But deeper analysis shows something else.
First of all, according to Metal Expert,
only 8.2 million t of new capacities have
real chances to be launched in SEA, as
poor infrastructure, high gas and water
tariffs together with expensive logistics
make production costs uncompetitive with
China’s. Imports to the region jumped 58%
over five years, and according to local
rolling producers the bulk of new steel
demand, which will grow by 10 million t in
three years, will be covered with imports.
Metal Expert
Secondly, India has already made decisive
steps to curb iron ore imports with
volumes plunging 63% to only 5.6 million t
in 2015 financial year (ended March 2016)
amid excess supply in the domestic
market. The ADIIS three months later
in its June report said the country will
become the third largest iron ore producer
in 2017 as its mines reopened after years
of suspension.
Further, China is truly slowing down. The
downtrend in China’s steel production
seems to be beyond doubt for everyone,
except the TOP miners. Baosteel Group,
CISA, Moody’s Investors Service, Morgan
Stanley, the National Development and
Reform Commission, WSA all say steel
production already peaked in 2014.
Macquarie Research forecasts 3% decline
by 2020, to 780 million t, citing weakening
consumption sector. Stricter than ever steel
reduction campaign initiated this year and
tighter environmental laws will not result in
output plunge but will certainly cap further
growth. Iron ore imports which nonetheless
continued to rise this year at the expense
of declining domestic production and were
stockpiled at ports, will drop 7% by 2020,
Goldman Sachs estimates.
And the thing is, the miners admit dramatic
changes in iron ore segment and they do
adjust to them.
In 2015 iron ore dropped to its nadir of
$38/t CFR and TOP-4 announced a
„„ THE MINERS ADMIT DRAMATIC
CHANGES IN IRON ORE SEGMENT
AND THEY DO ADJUST TO THEM
China Export in Focus | November 2016 | 43
RAW MATERIALS
„„ THE PACE OF OUTPUT GROWTH OF
TOP-4 WILL SLOW TO 1.9% IN 2016,
COMPARED TO A 20% SURGE IN 2014
combined $21 billion loss after $18 billion
profit in 2014, which was a huge three-fold
reduction from 2010. Immediately, a flurry
of production guidance cuts, lower-thanexpected output volumes, assets offered
for sale, and disinvestment programs
followed. Jean-Sebastien Jacques, the new
CEO of Rio Tinto, who shelved $20 billion
Simandou iron ore project on the second
day at the helm, even said “value” is now
more important than volume. Data compiled
by Metal Expert shows the pace of output
growth of TOP-4 will slow to 1.9% in 2016,
compared to almost 8% surge in 2015 and
20% in 2014.
Technically, only Vale still has a large
90 million tpy expansion plan, while the rest
out of TOP-4 have almost reached their
projected capacity or say it will be reached
“over time.” Shipments from the new mine
should total 30-40 million t next year, but
Vale, traditionally the most cautious in
ramping up production, recently said 2017
guidance will be lower and analysts believe
the company is considering reducing output
at some higher-cost mines.
But will this be enough to help iron ore stay
near $60/t CFR? Doubtful. Steel demand
in China is slowly decreasing after a creditfuelled boom seen in H1 and new iron ore
volumes continue to come on-stream, also
slowly. The market should probably forget
30-40% plunges in iron ore price seen during
the previous years, but the pressure will remain.
For 2016 and 2017, a consensus analysis
shows a 9% and 10% decrease in iron ore
price, respectively, and the picture looks fair.
„„ TOP-4 IRON ORE MINERS: COMBINED NET PROFIT/LOSS VS.
PRODUCTION GAINS
60
200
50
150
40
30
100
20
50
10
0
2010
2011
2012
2013
2014
2015
2016e
2017e
-10
0
-50
-20
-30
-100
production gains, %
44 | China Export in Focus | November 2016
net profit/loss, billion $
iron ore price, $/t CFR
Metal Expert
Metal Expert
China Export in Focus
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