This week, the party that went on for 25 years, finally came to an end.
We are talking about the party that the Chinese steel industry threw for the rest of the world, that sent economies on a high that was unmatched.
The country’s steel industry has been on the up since 1991, when it produced 71 million tonne (mt). By 2014, that had increased 12-fold. But in 2015, the steel production fell by 2.3 per cent to 803.83 mt. This was the first correction in 25 years. The high had ended.
Steel-GDP growth
Twenty-five years is a long time — a generation. And through this period, the Chinese steel industry mirrored the growth of the country’s GDP, which grew from a little over $400 billion in 1991, to over $11 trillion in 2015. This stupendous growth fuelled a boom in the global economy and was most visible in the commodities run. Everything, from iron ore to copper, rallied.
In these years, the Indian steel industry and its GDP have also grown handsomely but not as spectacularly. While India’s steel output increased from 27 mt in 1991 to about 90 mt in 2015, the GDP went up from $274 billion to $2.1 trillion.
Interestingly, an Accenture report shows a fundamental change in the co-relation between China’s steel industry and its GDP. Till 2013, the increase in steel consumption was in tandem with the growth of the country’s GDP. But in 2014, even as China’s GDP grew by 7.5 per cent, the steel consumption dropped by 3.5 per cent.
Quoting from the report: “The primary reason for this shift has been the Chinese Central Government’s policy pivot away from infrastructure and manufacturing toward services and consumer spending as the central drivers of economic growth. This pivot in turn is based on several factors including: demographics (aging population, declining workforce); the urgent need to reduce overall energy intensity and industrial CO2 emissions; the heavy indebtedness of regional and municipal governments; and declining economic productivity of infrastructure spending (due to overbuilding in the past).”
Repercussions
This has had a disastrous effect on the global steel industry, and in the commodities market. To sell its excess steel, China started exporting it, crossing a record mark of 100 mt in 2015. This led to a glut globally, as Chinese steel started flooding local markets, including India. Indian steelmakers asked the government for more protection, in the form of import duties.
The glut wrecked the UK steel industry too. In 2014, the country imported 687,000 tonnes of steel from China, doubling the amount from a year ago. This story by Telegraph shows the impact this has had on jobs. It says —
“A few decades ago, the industry used to employ hundreds of thousands of people and was a major contributor to the overall GDP and exports; today, it accounts for virtually none of the UK’s 31.3 million people in work. An astonishing 320,000 people were still employed by the industry in 1971, a figure that had fallen to 271,000 in 1978 and 44,000 by 1991.”
While it will be unfair to put all the blame for the UK steel industry’s woes on its Chinese counterpart, the latter has surely made a dent.
Companies have been reeling. Rio Tinto announced that it is freezing pay of its employees in 2016. In other words, employees will get no hikes this year. The world’s second largest miner gets most of its revenue from iron ore, the basic raw material for making steel. But the commodity’s prices have already fallen by 5 per cent this year, hovering around the $48 per tonne mark.
Interestingly, Rio Tino and the rest of the big iron ore miners are increasing their production as new capacities come on stream. There is a bigger game plan — to squeeze out the high cost miners and garner more market share. Another miner, Australia’s NRW Holdings has cut its CEO’s pay by 40 per cent.
Sadly, the hangover might continue through the year. Chinese GDP is not expected to accelerate any soon, and its steel industry would not be out of the woods.
The only bright spot in the global steel industry is India, where output is expected to grow the fastest in the world.