Wu Wenzhang President, SteelHome Website June 2012, NewYork · 2012. 6. 28. · Wu Wenzhang...

Transforming Chinese Steel Industry: Challenges and Opportunities

Wu WenzhangPresident, SteelHome Website

June 2012, NewYork

Shanghai SteelHome (SSH) is a platform providing comprehensive information, independent consultancy,database, industry events and E-commerce regarding steel and raw material industry.

With solid relationships with multiple Chinese steel mills, SteelHome is the leading independent Chinesesteel consultancy and data provider with wide spread contact base of steel producers, distributing and logisticsenterprisers, raw material producers, steel consuming industries, securities and futures, governmentdepartments, industrial Associations, industry research institutions etc.

About SteelHome

Deep Insight into China Steel Industry

I Transforming Chinese Steel Industry: Challenges and Opportunities

Major Content

Deep Insight into China Steel Industry

II Analysis on 2012 Chinese Steel Market

From 1949-2011, Chinese crude steel production/ consumption was 6.431 billion tonnesand 6.604 billion tonnes respectively. It goes through:

1.Initial Stage (1949-1980): Chinese steel industry system was initially set up. Crude steel productionrose from 158,000 tonnes in 1949 to 37.12 million tonnes in 1980. During 1949-1980, cumulative crudesteel production was 434 million tonnes, and the consumption was 481 million tonnes.

2.Transitional Stage (1981-2000): China welcomed “Reform and Opening-up”, with “Planned Economy”shifting to “Market Economy”. Chinese steel production ranks first worldwide since 1996. As of 2000,Chinese crude steel production came at 128 million tonnes, about 15 percent of global market. Even so,Chinese steel production still could not meet its domestic demand. During 1981-2000, Chinese steelproduction totaled 1.5 billion tonnes, and consumption summed at 1.735 billion tonnes.

3.Booming Stage (2001-2010): China joined WTO at the end of 2001 and went through global economiccrisis in 2008, during which time Chinese steel industry continued quick growth. In 2010, Chinese crudesteel production broke 600 million tonnes at up to 637 million tonnes, taking up 45.1 percent of the world.During 2001-2010, Chinese cumulative crude steel production was 3.813 billion tonnes, and consumptionwas 3.738 billion tonnes..


45. 1%

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Chinese Steel Industry Experienced Three Stages

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Chinese Crude Steel Production in 1949-2011 Chinese Apparent Crude Steel Consumption in 1949-2011

Chinese Cumulative Crude Steel Output VS Apparent Consumption

Chinese Crude Steel Production VS World Total in 1949-2011

A: Chinese steel industry is facing overcapacity in all aspects, with the emphasis on

transformation instead of rapid growth.

1. Up to the end of March 2012, annual BF pig iron capacity in China is 878 million tonnes, and crude steel

capacity is over 900 million tonnes. We expect Chinese crude steel capacity will be above 1 billion tonnes

by 2015.

2. Chinese economic growth will continue to be steady and relatively fast. Chinese government’s efforts of

economic restructuring and growth pattern transformation will reduce the steel consumption intensity.

There is limited room for further growth in crude steel consumption. We expect that Chinese annual crude

steel consumption will be in the peak range of around 750 million tonnes during 2013-2015.

3. Currently in China both steel varieties and production surpasses domestic demand.


78%81.1%

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Capacity Production Utilization rate

Chinese Steel Industry: Overcapacity In All Aspects

For 2012, we expect crude steel capacity in China to be above 900 million tonnes, production around 780million tonnes and capacity utilization to be around 81.1 percent.

For 2015, crude steel capacity and production may stay at around 1 billion tonnes and 780 million tonnesrespectively, making utilization rate 78 percent.

Forecast on Crude Steel Capacity and Production for 2012-2015

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source:SteelHome

kg/10000￥GDP

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% Final Consumption Rate% Capital Formation Rate%

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10000t Chinese annual crude steel consumption will bein peak range of around 750 million tonne in2013-2015.

Chinese Economic Structure in 2000-2010

Chinese Crude Steel Consumption / 10,000 RMB GDP in 2000-2010

Forecast on Chinese Crude Steel Consumptionin 2012-2015


0100200300400500600700800900

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10000tExport Import

Since 2005, Chinese steel production could meetdomestic demand in terms of quantity, but part ofproducts such as CRC, galvanized steel andsilicon steel etc. were still complemented byimports. By 2011, all steel products, exceptsilicon steel, saw higher exports than imports.

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Chinese Output and Apparent Consumption of Crude Steel in 2001-2011

Chinese Import/Export of Major Steel Products in 2011

Chinese Import/Export of Major Steel Productsin 2005


B: Chinese steel market price will hover around low level in the long term, and profit in

Chinese steel industry will remain low.

1. Chinese steel mills will use price competition to curb production and realize a supply/demand balance in

domestic market.

2. Price index is widely utilized in global raw materials market, and it will be increasingly difficult for

Chinese steelmakers to reduce production cost.


Profit and Profit Margin of Key Chinese Steelmakers in 2001-2012

In the first four months of 2012, major Chinese steelmakers announced a profit of 1.148 billion yuan and a profit margin of only 0.1 percent.

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Profit in Chinese Steel Industry To Remain Low

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Marketing Cost /tonne Steel of Chinese Key Steel Mills in 2005-2012

Management Expense /tonne Steel of Chinese Key Steel Mills in 2005-2012

Financial Cost /tonne Steel of Chinese Key Steel Mills in 2005-2012

Wage Cost /tonne Steel of Chinese Key Steel Millsin 2005-2012

Chinese steelmakers will have limited room to press down marketing cost and management expenses, accompanied with uptrend of financing cost and wage cost.

Profit in Chinese Steel Industry To Remain Low

C: Chinese steel industry will speed up restructuring and mergers & acquisitions, which will relieve

steel overcapacity.

1. Chinese government will strengthen energy-saving and environmental protection, which will sharply raise

production cost in energy-intensive and high-polluting steelmakers.

2. China steel industry suffers low profitability in the long run, favorable to stimulate competitive

steelmakers to conduct M&As.

3. China Banking Regulatory Commission see steel industry a most risky area for credit and therefore is

requiring commercial banks to reinforce risk management of loans to Chinese steel industry.


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Chinese Energy Consumption/10000 RMB GDP in 2001-2011

In 2010, China steel industry’s energy consumption registered at 18.4 percent, ranking first amid all theindustries.

In 2015, Chinese government targets energy consumption per 10000 GDP to decline by 16 percent over 2010and a reduction of 18 percent in industrial added value per 10000 yuan in steel industry.

Chinese Steel Industry to Speed up Restructuring

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2005 2006 2007 2008 2009 2010 2011 Jan-Apr2012Source:CISA,SteelHome

100mln RMb67.8%

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2005 2006 2007 2008 2009 2010 2011 Jan-Apr2012Source: CISA,SteelHome

Debt Asset Ratio of Chinese Key Steelmakers from 2005 to Apr.2012

Bank Loans of Chinese Key Steelmakers from 2005 to Apr.2012

In April 2012, the debt asset ratio of key Chinese steelmakers was 67.8 percent, up 10 percentage points over2005. The ratio of private steelmakers is much higher.

China Banking Regulatory Commission see steel industry a most risky area for credit and therefore isrequiring commercial banks to reinforce risk management of loans to Chinese steel industry.


Crude Steel Production in Top 10 Chinese Steelmakers against the country in 2001-2011

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49. 2%

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Nat i onal Top 10 Rat e%

Crude steel production in the top 10 Chinese steel mills will account for 60 percent in the country by 2015, according to the target of industrial policies.


D: Chinese steel industry will not pass overcapacity on to global market by increasing

exports.

1. Chinese government doesn’t encourage steel exports and in fact is controlling exports by means of

reducing export rebate, revoking rebate or increasing the export tariff etc.

2. Chinese crude steel consumption will sustain robust on the back of urbanization, industrialization and

infrastructure construction. China will remain the largest steel producer and consumer in the world.


Chinese Government not Encourage Steel Exports

Rebate & Tariff in Chinese Steel Export Product Rebate Export Tariff

Railway Steel Products 9%Heavy Section 0%Small-Medium Section 5%Other Section 5%-13%Common Bar 15%Stainless Steel & Alloy Bar 5%-13%Rebar 15%Wire Rod 15%Stainless Steel & Alloy Wire 9%-13%Common HR Band/Strip 0%Stainless Steel & Alloy HR Band/Strip 9%-13%CR Band, Coated/Plated Steel, Silicon Steel 13%Pipe 9%-13%Semis 25%Coke 40%Pig Iron 25%Scrap 40%

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m/ sq. km

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Chi na Fr ance Ger many Japan U. S U. K

m/ sq. km

28. 2%

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23. 9%

43. 1%

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Chinese Industrialization Rate in 1978-2011Chinese Urbanization Rate in 1978-2011

China & Other Countries Railway Density in 2010 China & Other Countries Road Density in 2010

Chinese Crude Steel Consumption to Remain High

In 2011, Chinese apparent crude steel consumption occupied 43.8 percent of the world, 23.8 percentage points higher than 2001. We expect China continue to be the largest steel producer and consumer worldwide.

Proportion of Chinese Apparent Consumption of Crude Steel to the Worldduring 2001-2011

China Continue to Be Largest Steel Producer and Consumer

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E: Chinese metallic supply will gradually improve.

1. Investment in Chinese iron ore mining continues to grow steadily and relatively fast and by 2015 we

expect crude iron ore capacity in the country to reach 1.7 billion tonnes and self- sufficiency to improve

substantially.

2. New iron ore capacity worldwide is mostly consumed by China. Around 600 million tonnes of iron ore

capacity by 2015, based on incomplete expansion plans announced by global major miners, surpasses

demand from global steelmaking industry.

3. Along with a rising scrap reservoir, dependency on imported iron ore will decline in Chinese steel

industry. SteelHome forecast that the dependency on iron ore imports will drop to 58.6% in 2015 versus

66.8% in 2011 and the iron/steel ratio will fall to 87% in 2015 and further to 80% in 2020.


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Chinese Crude Ore Production in 2001-2012FAI in Chinese Iron Ore Mining in 2001-2012

Chinese Monthly Annualized Iron Ore Output in 2008-2012 Investment in Chinese iron ore mining grew 28.1%

in the first five months of 2012.

Chinese crude iron ore production was 1.327 billiontonnes in 2011, of which annualized production inJune, August, September, October and Novemberbroke 1.5 billion tonnes.

Chinese crude ore production is expected to rise to1.7 billion tonnes by 2015.

Chinese Metallic Supply To Improve

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1mln tOthers China

Chinese/Non-Chinese Iron Ore Production in 2001-2011

Chinese/Non-Chinese Pig Iron Production in 2001-2011

In 2011, pig iron production in non-Chinese areas was 529 million tonnes, up 5.55 million tonnes upon 2006 while iron ore production rose 379 million tonnes to 1.6 billion tonnes. At the same time, Chinese iron ore imports rose around 360 million tonnes from 2006 to 686 million tonnes.

Around 600 million tonnes of iron ore capacity by 2015, based on incomplete expansion plans announced by global major miners, surpasses demand from global steelmaking industry.


Forecast on China Scrap Reservoirs in 2012-2020

6071

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27041

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Chinese obsolete scrap reservoir will rise to 150 million tonnes by 2015 and further to 270 million tonnes in 2020. With annual 60pct recycle and new scrap, China scrap recollection will come to around 100 million tonnes in 2015 and 170 million tonnes in 2020, which represents an increase of 35 million tonnes and 100 million tonnes from 2011 respectively.

Source：SteelHome


Forecast on Chinese Iron/Steel Ratio in 2015-2020

Chinese iron/steel ratio was 92.2% in 2011, down 6.2 points from 2006. SteelHome expect the figure to slide to 87% in 2015 and 80% in 2020.

80%

92.2%87%

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Pig iron Crude Steel iron/steel,%


Chinese dependency on iron ore imports, 66.8% in 2011, may fall to 58.6% in 2015.

58.6

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Chinese Dependency on Iron Ore Imports in 2012-2015



1.Chinese crude steel production will be 730 million tonnes in 2012, up 6.8% year on year (on 683

million tonnes announced by NBSC). However the figure is practically 5% as we believe Chinese crude

steel production in 2011 was around 695 million tonnes.


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35gr owt h, %2012e Jan. - May. 2012gr owt h%( e) gr owt h%


2012 Chinese Crude Steel Production to be 730 Million Tonnes

Forecast on Chinese Crude Steel Production in 2012

Chinese crude steel production in the first five months of 2012 was 296 million tonnes (711 million tonnesannualized), up 2.2% year on year (or up 1.5% on annualized basis). Crude steel production in 2012 mayreach 730 million tonnes, up 6.8% year on year on NBSC basis or 5% as we believe Chinese crude steelproduction was practically around 695 million tonnes in 2011.





2.Chinese GDP will be 8% or above in 2012, higher in the second half of the year than the first; Crude

steel consumption will be around 700 million tonnes in 2012, up 8% from 2011 or 6.1% compared to

the real data for 2011 calculated by SteelHome.


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2012e Jan. - May. 2012gr owt h%( e) gr owt h%

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Forecast on Chinese Crude Steel Apparent Consumption in 2012

Chinese apparent consumption in the first five months of 2012 was 297 million tonnes on crude steel equivalent basis (670 million tonnes annualized ), up 1.1% year on year (or up 0.5% on annualized basis).

We expect Chinese crude steel consumption in 2012 to be around 700 million tonnes, up 8% on NBSC basis or 6.1% after our correction.

2012 Chinese Crude Steel Consumption to be around 700 Million Tonnes








3.Chinese net exports on crude steel equivalent basis will be around 35 million tonnes in 2012.


2012 Chinese Net Exports of Crude Steel Equivalent to be Around 3500 MT

Forecast on Chinese Net Export of Crude Steel Equivalent in 2012

Chinese net export of crude steel equivalent in the first five months of 2012 was 17.06 million tonnes on a crude steel equivalent basis (40.98 million tonnes annualized), up 23.8% year on year (or up 23% on annualized basis). We expect Chinese net export in 2012 to be around 35 million tonnes, 34.84 million tonnes in 2011.

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4.Chinese domestic raw material prices in 2012 are expected to be lower than 2011. Iron ore supply will

relatively ease and import price may average $140; Coke price will keep steady.


82004

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2012 China Iron Ore Supply to Relatively Ease

Chinese Crude Ore Production in Jan.-May 2012

Chinese Crude Ore Annualized Production in 2009-Apr.2012

Chinese Iron Ore Imports in Jan.-May 2012

Chinese Iron Ore Annualized Imports in 2009-Apr.2012

China is already equipped with 1.55 billion tonnes of iron ore capacity. Chinese iron ore import will be determined by the global price. We expect the import this year to be basically around the figure in last year.

138. 43

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Chinese Iron Ore Import and Average Import Price in 2001- Jan.-May.2012

2012 China Iron Ore Import Price to Be Lower than 2011

Chinese iron ore import price is expected to average US$ 140 per tonne (based on China Customs) in 2012, almost 15 percent lower than 2011.

Chinese coke supply is expected to rise 8.3% year on year to 460 million tonnes in 2012. Chinese cokingindustry is oversupplied, and. coking plants see deficits widespread.

China Coke Market Price: Limited Room to Head down

Chinese Coke and Pig Iron Production in 2001-2012

0. 56

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4.Chinese domestic raw material prices in 2012 are expected to be lower than 2011. Iron ore supply will

relatively ease and import price may average $140; Coke price will keep steady.

5.Chinese domestic steel price is expected to see recovery in the third quarter of 2012 and to keep

undulating in the fourth quarter; Average price this year to be lower than 2011.


Shanghai HRC & Rebar Price in 2009-2012

Impacted by sovereign debt crisis in Europe and turmoil in global financial and commodities market, steel prices in China fell back in Mid April. China is seeing deficits across steel mills.

Chinese domestic steel price is expected to see recovery in the third quarter of 2012 and to keep undulating in the fourth quarter; Average price this year to be lower than 2011.

Forecast on H2 Chinese Steel Market Price

H2 2012

Avg.3550 RMB/tonne in 2009



Avg.4400RMB/tonne in 2012

peak

bottom

Conclusion

● Chinese steel industry will be in transformation stage during 2011-2020. Chinese steel industry is facingovercapacity in all aspects.

● We expect that Chinese annual crude steel consumption will be in the peak range of around 750 milliontonnes during 2013-2015.

● Chinese steel market price will hover around low level in the long term, and profit in Chinese steelindustry will remain low.

● Chinese steel industry will speed up restructuring and mergers & acquisitions.

● Chinese government doesn’t encourage steel exports, and it will not pass overcapacity on to globalmarket by increasing exports.

● Along with a rising scrap reservoir, dependency on imported iron ore will decline in Chinese steelindustry.

● For 2012, Chinese crude steel production will be 730 million tonnes; Crude steel consumption will bearound 700 million tonnes.

● Chinese domestic steel prices are expected to see recovery in the third quarter of 2012 and to keepundulating in the fourth quarter.

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Wu Wenzhang President, SteelHome Website June 2012, NewYork · 2012. 6. 28. · Wu Wenzhang...

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