China’s Steel Juggernaut Gathers Speed in Asia as West Fades
Oct 25, 2016
Bloomberg
A third of all Chinese steel shipments now end up in countries like Vietnam, Thailand and the Philippines, where rapid economic growth is fueling increased spending.
China’s steel juggernaut is picking up speed closer to home.
As governments in Europe and the U.S. limited supplies of Chinese metal they said was dumped on the market,
the world’s largest producer is expanding exports to its neighbors in Southeast Asia. A third of all Chinese shipments now end up in countries like Vietnam, Thailand and the Philippines, where rapid economic growth is fueling increased spending on infrastructure including highways, airports and office towers.
Southeast Asia’s growing appetite for steel is helping to ease the pain of a global surplus that sent prices plunging last year. It is giving new life to government-owned mills that China had sought to close. But rising imports also are posing longer-term competition for high-end steel products made in Japan and South Korea as China pursues a bigger role in the region’s economy.
“Imports are coming by leaps and bounds,” said Tan Ah Yong, secretary general of the Southeast Asia Iron & Steel Institute, an industry group based in Selangor, Malaysia.
Ten nations in Southeast Asia accounted for 37% of China’s steel exports in the first nine months of 2016, up from 32% a year earlier, and 20% five years ago, according to Chinese General Administration of Customs data. Southeast Asia has been by far the biggest driver of the increase in Chinese shipments, accounting for about two thirds of last year’s gain and almost all of it this year.
Half the World's Steel
China makes half the world’s steel and has been sending more overseas as its domestic capacity rose faster than demand.
Global shipments more than quadrupled since the 2008 financial crisis, reaching a record last year, and prices dropped as much as 64% from a peak in 2011. While the market recovered some of those losses this year as Chinese demand improved, the prolonged surplus has forced mills to close across five continents.
To be sure,
even before the tariffs were imposed, western countries weren’t major destinations for Chinese steel. Less than 1% of exports went to the U.S. in the first nine months of 2016, the lowest in five years, and less than 6% ended up in Europe, government data show. Those shipments are shrinking as sales jump in Asia, where China’s government seeks more economic and trade clout. Southeast Asia was the biggest source of new demand in the past five years.
A Boon to Steel Buyers
For now, supply has been a boon to buyers in Southeast Asia, where infrastructure spending is expected to expand through the rest of this decade.
Vietnam’s economy will grow 6% this year, as the Philippines expands 6.4% and Indonesia 5%, according to economists surveyed by Bloomberg.
China is seeking a bigger role in the economies of its neighbors under a policy called One Belt, One Road, which aims to stimulate new trade links. The government also is funding projects in the region through the China-led Asian Infrastructure Investment Bank to develop more markets for its exports.
Philippine President Rodrigo Duterte, during his visit to Beijing last week, got $24 billion of investment and funding pledges from China, including $11.2 billion of preliminary agreements for projects including railways, ports and energy projects.
While most of China’s exports are commodity products commonly used in construction, mills are investing and exporting more higher-end steel like coated sheet and rolled coil used in manufacturing.
Baosteel Group Corp. and Wuhan Iron & Steel Group Corp., which are merging under a plan intended to consolidate the industry, are building two huge plants on the south coast of China, each with nearly 10 million tons of capacity. These are low-cost, high-quality plants designed to serve domestic markets as well as those elsewhere in Asia, said Laura Zhai, an analyst at Fitch Ratings Inc.
“Where Japan and Korea have already been displaced is the kind of middle-of-the-road flat products like re-rolling grades of hot-rolled coil,” said Tomas Gutierrez, an analyst at Kallanish Commodities Ltd. in Shanghai.
Such incursions pose a competition for more established companies in the region including Nippon Steel & Sumitomo Metal Corp. and JFE Holdings Inc., Japan’s top two producers, or South Korea’s Posco.
While competition is sure to increase, the influx of Chinese supply may have limited impact on markets for higher-end steel, especially from Japanese or Korean manufacturers with operations in Southeast Asia, said Risaburo Nezu, a senior research adviser at the Research Institute of Economy, Trade and Industry in Japan.
“I question if Japanese manufacturers will shift away from Japanese steel in favor of Chinese steel,” Nezu said. “I don’t know how realistic that possibility is.”
