China changing steel market

In 2003, world crude steel production reached a record high of 962 million tons. This year, the billion-ton production level will be eclipsed.

Production in China last year was 220 million tons, an increase of more than 20% on 2002. The country is the first to produce more than 200 million tons of steel in a single year; it now accounts for just under a quarter of all steel production.

The growth in both steel consumption and production in China continues to exceed forecasts. In recent years, most forecasts assumed that China was operating close to capacity. However, the country’s steel industry has shown a remarkable ability to install new steel-making capacity to meet the growing domestic demand for all types of steel.

In 2003, the West reached a capacity constraint, with demand exceeding supply, and this coincided with a dramatic increase in steel prices. The constraint has not come from the steel-making industry itself but in the supply of iron ore and in bottlenecks in transportation to the steelplants. There is not enough capacity in the Chinese rail system or in its ports. There is not enough shipping freight capacity in the world to transport all the iron ore and coking coal necessary. The congestion in unloading and loading facilities at ports only aggravates the constraint on shipping capacity.

With the constraint in ferrous units available from iron ore, steelplants have increased their use of ferrous scrap. This has led to a dramatic rise in the price of scrap in recent months, and has changed the economic balance between blast furnace and electric arc furnace steelmaking. The rise in the use of ferrous scrap also means steelplants are turning away orders because they cannot be sure of obtaining the necessary raw materials. In recent years, most of the stimulus for price increases came from raw material constraints; the increases in steel prices may have only been enough to match the increase in raw material and freight costs.

The lessons in all this are clear: steel is now a global business, and developments in China can fundamentally affect the operations of a small electric-arc steel producer supplying only local needs on the other side of the world.

— The preceding is from an information bulletin published by the International Iron and Steel Institute, based in Belgium.