Growth in China and its impact on the global raw materials ... · Growth in China and Impact on...

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1

Growth in China and its

impact on the global raw

materials market

27 September 2012

Platts SBB Steel Raw Materials Europe Conference 2012

http://www.steelconsult.com/


2

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SteelConsult International has made every reasonable effort to compile any information with care and diligence, SteelConsult makes no

statements, representations nor guarantees about the accuracy or completeness of the information or any part of it and that no-one

should seek to rely on the report or any part of it for any purpose.

• SteelConsult International cannot accept and disclaims all responsibility and all liability (including, and without limitation, liability in

negligence) for any costs, damages, expenses or losses incurred from any reference to the report by any party, howsoever arising.

Growth in China and Impact on Global Raw Materials Market

Copyright and disclaimer



3


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4

Growth in China and Impact on Global Raw Materials Market – Contents

Contents

• Impact of China on raw materials market

• Short term outlook

• Long term outlook

• Conclusions



5

Source: WSA, CLSA Asia-Pacific Markets, Tex Report, SteelConsult

Growth in China and Impact on Global Raw Materials Market – Impact

China has an important impact on both demand and supply of iron ore. With regard to demand, it has increased its share of the global seaborne iron ore market from ~5% in 1990 to ~60% today

14 1925 33

37 41 4455 52 55

70 92 111148

208 275326

383444

628

619687

0

200

400

600

800

1,000

1,200

1,400

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

Japan Europe

Other East Asia China

ROW

Imports of iron ore (mln tonnes)



6

Source: WSA, CLSA Asia-Pacific Markets, Tex Report, SteelConsult

Note: * rich ore equivalent


In addition to being the world’s largest importer of iron ore, China is also one of the largest producers. Its impact on the global supply/demand balance is compounded by volatile switches between domestic supply of ore and imports

111 105 102 109

208 214

285

356

400

321

234

360

336

5570

92111

148

208

275

326

384

444

628 619

687

0

100

200

300

400

500

600

700

800

'99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

China domestic production*

China imports

Chinese consumption of iron ore by origin (mln tonnes)

67%

60%

53%49%

58%

51% 51% 52% 51%

42%

27%

37%33%

33%

40%

48%51%

42%

49% 49% 48% 49%

58%

73%

63%67%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

'99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

China imports

China domestic production*

Chinese consumption of iron ore by origin (%)

Chinese mills switched

massively from domestic

ore to more imports, as

international ore prices fell

sharply in crisis year 2009



7

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

'80

'81

'82

'83

'84

'85

'86

'87

'88

'89

'90

'91

'92

'93

'94

'95

'96

'97

'98

'99

'00

'01

'02

'03

'04

'05

'06

'07

'08

'09

'10

'11

'12Y

TD

0

50

100

150

200

250

300

Consumption Price

Global consumption of iron ore (mln tonnes)

Source: Tex report, SBB, SteelConsult analysis


Between 1970-2002, the world had plenty of iron ore mining capacity. In 2002 and 2003, world mining capacity could still cope with rising Chinese demand, it was only from 2004 that prices started to surge, as a direct impact of booming Chinese steel production

Price (US$/dmtu)

Chinese government

reforms housing market

promoting private home

ownership…

Chinese steel

consumption

takes off…

Global iron ore

prices start to

surge



8


Contents




• Conclusions



0

20

40

60

80

100

120

140

J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A

0

20

40

60

80

100

120

140

China

EU, NAFTA & Japan

World

9

Growth in China and Impact on Global Raw Materials Market – Short Term Outlook

In contrast to the mature markets, Chinese steel output has continued to rise firmly, but production fell sharply in August and further production cuts seem likely

Crude steel output, index (May 2008 = 100)

Source: WSA, SteelConsult

2008 2009 2010 2011 2012



40

45

50

55

60

J F M A M J J A S O N D J F M A M J J A S*

Brazil

Russia

India

China

PMI balance point

10

Source: Markit, HSBC

Note: * flash

Manufacturing PMI Index


Chinese Manufacturing PMI continues to struggle below 50, showing the weakest performance of the BRIC countries

2011 2012



11

Source: EIU


Inflation in China has fallen to 2%, but remains a point of concern for the Chinese government

Inflation rate China (consumer prices, YoY% change)

-4%

-2%

0%

2%

4%

6%

8%

10%

J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A

2007 2008 2009 2010 2011 2012



12


China’s steel demand is mainly driven by the construction sector, which accounts for almost 50% of total consumption

0

100

200

300

400

500

600

700

'05 '06 '07 '08 '09 '10 '11

Construction Machinery

Automobile Shipbuilding

Appliance Other

Steel consumption China by sector (mln tonnes)

Source: CLSA Asia-Pacific Markets

6%

14%

17%

5%48%

9%

Construction

Machinery

Automobile

Shipbuilding

Appliance

Other

Steel consumption China by sector, 2011 (%)



13


9.4%

-2.9%

2.8% 3.0%

8.0%

-1.4%

9.5%

5.1%

-3.5%

-23.7%

21.2%

5.1%

-0.9%

0.8%1.4%

27.1%

21.1%

25.7%

14.7%

26.0%

8.7%10.8%

6.8%

23.4%

6.6% 6.2%

2.0%

5.0%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12f '13f

ROW China


As construction and shipbuilding activities slow down in China, demand is expected to cool down to 2% in 2012 and 5% in 2013, though remain well above growth levels in the Rest of the World

YoY growth in steel consumption (%)



14


1.6%

6.5%

8.2%

6.3%

9.2%

7.0%

0.0%

-6.4%

14.1%

5.6%

0.4%

2.7%

10.1%

7.6%

-10%

-5%

0%

5%

10%

15%

20%

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12f '13f

Av. growth 1950-2011: 3.7% p.a.

YoY growth in global steel consumption (%)


Global steel consumption is expected to increase by only 0.4% in 2012, and 2.7% in 2013, well below its long term growth rate



15


Contents




• Conclusions



16

0

500

1,000

1,500

2,000

2,500

'20

'22'2

4'2

6'2

8'3

0'3

2'3

4'3

6'3

8'4

0'4

2'4

4'4

6'4

8'5

0'5

2'5

4'5

6'5

8'6

0'6

2'6

4'6

6'6

8'7

0'7

2'7

4'7

6'7

8'8

0'8

2'8

4'8

6'8

8'9

0'9

2'9

4'9

6'9

8'0

0'0

2'0

4'0

6'0

8'1

0'1

2'1

4'1

6'1

8'2

0'2

2'2

4'2

6'2

8'3

0'3

2'3

4'3

6'3

8'4

0'4

2'4

4'4

6'4

8'5

0

Global consumption of finished steel (mln tonnes)

Source: WSA, USGS, SteelConsult analysis

Growth in China and Impact on Global Raw Materials Market – Long Term Outlook

The growth in global steel use seen before 2000 was driven by the development of 1bn consumers in North America, Europe and Japan... since 2001 growth has been mainly driven by 1.3bn consumers in China. How much further growth potential does China have?

1920-

1929

CAGR

5.8%

1929-1945

CAGR -0.4% 1945-1974

CAGR 6.5%

1974-2001

CAGR 1.0%

2001-2011

CAGR

6.0%

Roaring

twenties Great Depression

& WWII

1 billion people in North

America, Europe, Soviet Union

and Japan (re)building

infrastructure and developing

steel intensive lifestyles

Steel consumption growth

declines as Soviet Union

collapses and demand in now

mature markets of the Atlantic

Basin and Japan shifts from

expansion and first time buying

to replacement and repair &

maintenance markets

1.3bn people in China

building infrastructure

and developing steel

intensive lifestyles…

?

…and 1.2bn in India…

…and 2bn in SE Asia, Latin

America and Africa



17

Source: United Nations Population Statistics


A number of fundamentals suggest Chinese steel consumption still has some way to grow. Urbanization, for example, will continue over the next decades, though, since 2010, at an ever declining rate

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

1990 1995 2000 2005 2010 2015 2020 2025 2030 2035

Urban Rural

Population growth China (average YoY growth, %)

242303

376455

556

660762

846912 958 984

815

842

838

814

752

681

608541

484 435 397

0

200

400

600

800

1,000

1,200

1,400

1,600

1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035

Urban Rural

Urbanization China (mln people)



18

0

200

400

600

800

0 10,000 20,000 30,000 40,000 50,000 60,000

0

200

400

600

800

Finished steel consumption/capita (kg), 2010

GDP(PPP)/capita (US$), 2011

Germany

USA

Brazil

India

Japan

Source: WSA, CIA, Tata Steel Construction Centre NL, SteelConsult

Malaysia

World average

China

EU-27

Long term OECD average (415kg/head)


Steel markets typically develop along an S-curve. The shape and peak of the curve varies considerably by country...

Thailand

Philippines

Vietnam

Indonesia Emerging

Mature

Example of typical S-curve of a

developing steel market

Steel demand booms as a result of

infrastructure and industrial

development, first time buyers of

cars, appliances etc.

Focus of the economy on industry

Steel demand slows down and

stabilizes, based mainly on construction

replacement and repair & maintenance,

replacement of cars, appliances etc.

Focus of economy on services sector

Steel demand low, focus of economy on

agricultural sector



19

0

200

400

600

800

1,000

1,200

1,400

'67 '69 '71 '73 '75 '77 '79 '81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11

China Germany Japan South Korea

Consumption of finished steel per capita (kg/head)

Source: WSA, SteelConsult analysis


How far has China progressed with its economic development and when and at what level will its steel consumption peak? Other now developed countries peaked at 550-750kg/head in the past

South Korean peak

1,211kg/head (2007)

Japanese peak

752kg/head (1990)

German peak

541kg/head (1969)



20


May China peak at similar steel consumption levels as other countries in the past? Weight reductions imply a significant downside impact…(1)

• Important weight savings are well known to have been realized in the use of steel in cars (thinner

gauges, lower losses, new technologies (hydroforming/TWBs)), beverage and food cans (-30% over

the last 30 years as a result of thinner gauges, concave bottoms, curved necks, rims etc.), and many

other products.

• In addition, considerable savings have also been realized in the use of steel in construction, which

accounts for about half of Chinese steel demand. Indeed, over the last decades steel intensity in

construction has been reduced by three factors:

• Better steel grades

• Better design, fabrication and application of steel products

• And better design of buildings and structures

• Better steel grades:

High strength (and thus thinner) steels, weldable steels, less impurities. Indeed, high strength rebar

used today has a yield strength of 500 MPa compared to 250 MPa in the 1950s, roughly implying a

50% reduction in weight required.



21


May China peak at similar steel consumption levels as other countries in the past? Weight reductions imply a significant downside impact…(2)

• Better design, fabrication and application of steel products:

• Rebar and mesh wire rod: longer lengths, fit for purpose, superior rebar patterns with more

grip, use of pre-stressed rebar, less overlap required, weldable qualities, prefab products with

lower scrap losses, better cement qualities requiring less reinforcement/m3 and less m3 to be

reinforced.

• Sections and merchant bars: longer lengths, fit for purpose, asymmetrical shapes, parallel

flanges instead of tapered, sharp corners, less overlap in application, welding instead of

rivetting, prefab with lower scrap losses.

• And better design of buildings and structures:

• Better/optimized design of buildings and structural strength, better understanding of

behaviour and robustness, better understanding of wearing and fatigue, less

“overspecification” for safety precaution. Especially for (high rise) buildings and structures

using sections and merchant bars, but also for reinforced concrete.



22


The Eiffel Tower, for example, today could be built using only a third of the steel (wrought iron) used in 1889

• The Eiffel Tower, for example, today could be built using only a third of the steel tonnage (wrought

iron) used in 1889*.

• However, the most substantial weight gains in the use of steel were already booked before the

1945-1975 period.

• Furthermore, weight gains in steel are often partially compensated by extra weight elsewhere

(larger dimensions for longer durability, more focus on design, aesthetics and prestige, rather than

mere functionality).

Eiffel Tower: 319m high,

7,300tonnes of steel (wrought iron)

ArcelorMittal Orbit: 115m high,

1,400tonnes of steel

Source: *Tata Steel Construction Centre NL, AISI



23


May China peak at similar steel consumption levels as other countries in the past? On the other hand, the high penetration of steel in various Chinese construction segments suggests a considerable upside compensating for lower steel weight

• Whilst considerable weight savings have been realized over time in the use of steel, the steel

intensity of construction in China is still relatively high from another perspective, as China has a high

proportion of high rise buildings, which require more steel on a relative basis.

• Indeed, high rise buildings consume upto 5 times as much steel per square meter of floor as low-

rise buildings.

• Furthermore, China uses significantly more steel in the residential construction sector, which has

more high rise apartment buildings, and accounts for 34% of total Chinese construction related steel

consumption.



105 87 101103111123124158

191240

276

348378

418447

551588

624637668

701734

767800

833851868886904

797

0

100

200

300

400

500

600

700

800

900

1,000

'94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11'12*'13*'14*'15*'16*'17*'18*'19*'20*'21*'22*'23*'24*'25*'26*'27*'28*'29*'30*'31*'32*'33*'34*'35*


Finished steel consumption (mln tonnes)


The Chinese steel market is to continue to grow, though more slowly in the next decade, and is expected to peak at ~900m tonnes in the early 2020s

24

CAGR 3.4% CAGR 15.8%

Assumption: China achieving consumption

peak of 650kg/head by 2022

Assumption: Chinese consumption

falling to 575kg/head by 2035

CAGR -1.0%



25


China has over US$3 trillion of foreign reserves. Though these are only partially available, they still provide a considerable buffer for potential further stimulus, if and when required

30 44 21 22 53 75 107 143 149 146 166 212286

403

610

819

1,068

1,528

1,946

2,399

2,847

3,181

586

157

0

500

1,000

1,500

2,000

2,500

3,000

3,500

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

Source: IMF, China State Administration of Foreign Exchange

Note: Excl. gold, end of year figures

Foreign reserves China, US$bn

Stimulus

package

2009

Stimulus

package

2012



26

Source: SteelConsult analysis

Note: *including credits for offgases

Operational production cost/t slab/billet, US$/t, 2012 Q1-Q3


Chinese steel mills are competitive in their own domestic market, but not sufficiently competitive to be major structural exporters of steel to the world market. Chinese steel production is likely to develop in line with domestic demand

426 428 430 404 392363

416

334

30 1242

48

16

61

2626

2725

48 27

16 66 7237

798250

26

0

100

200

300

400

500

600

700

800

EU Coastal EU Inland Brazil Ukraine China USA Turkey (scrap

based EAF)

Middle East (DRI

based EAF)

Raw materials Freight raw materials Labour Other operational production costs and energy*

Integrated mills EAF mills



27

Source: WSA, SteelConsult analysis

Notes: *Calculated as moving average of finished steel consumption during previous 15

years, indicative only

0

500

1,000

1,500

2,000

2,500

'85

'86

'87

'88

'89

'90

'91

'92

'93

'94

'95

'96

'97

'98

'99

'00

'01

'02

'03

'04

'05

'06

'07

'08

'09

'10

'11

'12*

'13*

'14*

'15*

'16*

'17*

'18*

'19*

'20*

'21*

'22*

'23*

'24*

'25*

'26*

'27*

'28*

'29*

'30*

'31*

'32*

'33*

'34*

'35*

Global consumption of finished steel

Global production of crude steel

Global obsolete scrap recovery base*

mln tonnes


Current scrap availability is dependent on steel consumption in the past. Due to China’s rapid surge in steel output in the last decade, the world is facing tightness in scrap. More scrap will become available once China’s scrap cycle catches up with steel output

Obsolete scrap available for recycling is

dependent on finished steel consumption

in the past (used cans, cars, rails, ships,

demolished buildings etc.)

Driven by China, steel production and

consumption have shown unprecedented

growth from 2002, especially in tonnage

terms…

…while obsolete

scrap availability is

restricted by

considerably lower

average finished

steel consumption

during the last 15

years or so...

Scrap

tightness

Scrap abundance

Scrap abundance

…More scrap

becoming

available in

China as steel

intensive

products and

buildings reach

their end-of-life



0.150.170.170.180.190.200.210.240.270.33

0.42

0.54

0.65

0.760.76

0.880.971.011.021.061.10

1.141.181.231.271.291.311.331.35

1.13

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

'94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11'12*'13*'14*'15*'16*'17*'18*'19*'20*'21*'22*'23*'24*'25*'26*'27*'28*'29*'30*'31*'32*'33*'34*'35*


Chinese iron ore consumption (mln tonnes)


Though steel production growth will slow down and EAFs and BOFs will likely gradually use more scrap over time, the Chinese steel industry is expected to still require some 350m additional tonnes of iron ore over the coming decade

28

CAGR 2.7% CAGR 15.5%

Assumption: China achieving steel

consumption peak of 650kg/head by 2022

Assumption: Chinese steel consumption

falling to 575kg/head by 2035

CAGR -1.4%



29

Source: CLSA Asia-Pacific Markets, SteelConsult


Most of the extra volumes will need to be imported from overseas, with total Chinese ore imports forecast to reach almost 1bn tonnes in 2016

0

200

400

600

800

1,000

1,200

1,400

1,600

'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16

China ROW

Seaborne imports of iron ore (mln tonnes)



30


Contents




• Conclusions



31

Growth in China and Impact on Global Raw Materials Market – Conclusions

Conclusions

• China has likely already entered a period of slower growth in steel consumption. The country’s

steel demand is expected to grow by only 2% in 2012 and 4.5% in 2013. After recording growth of

15.8% between 2000 and 2011, growth in the next decade is expected to fall back to ~3.5% per

year, on average. This still represents 280m tonnes of extra steel demand, and ~350m tonnes of

extra iron ore demand, most of which will need to be imported.

• Like other, now industrialized countries in the past, Chinese steel consumption will inevitably slow

down and then peak, which we estimate to happen at a level of ~900m tonnes in a decade from

now, and then gradually decline.

• China is not sufficiently competitive to become a major exporter of steel on a structural basis, and

except for some relatively modest net exports, will see steel production develop in line with

domestic demand. However, European mills, and their raw materials suppliers, may still on

occasion be hit by temporary exports of excess steel from China. Any small imbalance in China will

translate to large tonnages hitting the global market. A 10% reduction in capacity utilization in

China equals the entire amount of overcapacity in the CIS in the early nineties, after the collapse of

the former Soviet Union, at any point in time.



32

Growth in China and Impact on Global Raw Materials Market – Conclusions

Conclusions

• China will increasingly generate scrap over the next few decades. Whilst part of it will likely be

processed by domestic BOF mills, which today have relatively low scrap rates, and by possible

new EAFs, a considerable part will likely be exported, gradually easing tightness in the global scrap

market.

• A slowdown in China will have mixed consequences for EU steel mills. Gradually declining global

raw materials prices in the coming years will be a relief to EU mills, who export very little to China,

and who are currently sandwiched between weak sales prices for their own products, and high

purchase prices for their raw materials.

• On the other hand, there may an increased risk of regular flares of Chinese steel exports

targeting the EU market. Furthermore, some EU mills, especially the quality leaders, may be hit by

a loss of volume by declining exports to China of high quality steel intensive products, in particular

top end German cars and machinery. Both factors would impact on European demand for

steelmaking raw materials.



33


Thank you for your attention!

SteelConsult International

Binderij 3-S

1185 ZH Amstelveen

The Netherlands

Tel: +31 20 661 8900

Fax: +31 20 661 8901

Email: [email protected]

www.steelconsult.com

www.steelearningsbarometer.com


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