China’s steel consumption is mind-boggling.
It is the world’s leading consumer, producer, and exporter of steel.
(Steel is one of the main building blocks used in bridges, cars, ships, skyscrapers, and other infrastructure.)
China now controls nearly 50 percent of the world’s steel – up from 10 percent in 2005. It also produces 45 percent of the global total. Just over ten years ago, the U.S. accounted for 14 percent of world steel production… today it’s at just 4 percent.
China exports about 3.5 percent of its steel production abroad. Chinaexports more steel per year than Japan, the world’s second leading steel maker, produces each year.
This gives China significant pricing power in the global steel market. And that’s causing non-Chinese steel producers a lot of pain.
You see, China consumed billions of tonnes of steel to urbanize over the last two decades. It used steel to build dozens of cities, train lines, roads, and bridges.
World supply rose from 753 million tonnes in 2005 to a peak of 1.6 billion tonnes in 2014. (That’s enough steel to build around 30,000 Empire State Buildings.)
But China’s economic growth is slowing down. It doesn’t need the same amount of steel it did 10 years ago (let alone 5 years ago), when its economy was growing 10 percent per year. The rest of the world doesn’t need as much steel either, as global economic growth is also slowing down.
But China doesn’t want to give up market share by curbing supply. And it also doesn’t want hundreds of thousands of steel workers to lose their jobs – which could cause social unrest. So China is continuing to produce more steel than it, or the world, needs.
China produced 70.5 million tonnes of steel in May. That’s just shy of its all-time monthly high of 70.65 million tonnes – that’s enough steel used to make every car in the world last year.
Chinese steel producers are using government subsidies to export steel at much lower prices than other steel producers – a practice known as “dumping.” This helped cause U.S. steel prices to drop 46 percent between April 2014 and December 2015.
Although lower steel prices are great for consumers, they’re terrible for producers. Chinese dumping has forced global producers to shut down plants in Mexico, the U.K., Australia, and the U.S.
U.S. Steel – America’s largest steel company – lost US$1.6 billion in 2015. It’s shedding 25 percent of its North American workforce. And German steel workers have been protesting Chinese dumping for some time.
But things have changed this year. U.S. steel prices have soared over 70 percent so far. China’s steel prices started the year strong, but collapsed in April. So, there is currently a divergence between U.S. and Chinese steel prices – one is rising, the other is falling.
Why is this happening? There was a decline in steel production of 3.6 percent in the first quarter of this year. This helped lift prices around the world.
But the U.S. also passed a new trade enforcement bill in March. This bill allows the government to take action against Chinese steel “dumping.” As a result, the U.S. has imposed a 266 percent tariff on Chinese steel imports. And this is reportedly being increased to an astounding 500 percent – which is helping to protect U.S. producers and has allowed them to raise their own steel prices.
The EU has also imposed its own tariffs, but they’ve been increased by only 13 percent on Chinese imports.
Despite this, the outlook for steel prices this year remains bleak. China continues to produce record amounts of steel. And demand is expected to fall by 0.8 percent this year. With too much supply and falling demand, prices should remain low globally.
But 2017 looks brighter. The World Steel Association (WSA) expects steel demand to rise by 0.4 percent in 2017. It also expects demand outside of China to increase.
Meanwhile, China agreed to cut steel production capacity by 150 million tonnes by 2020 – about 9 percent lower than 2015 levels. (This will put 500,000 Chinese steel workers out of work. But the government says it will provide financial aid.)
Steel prices and companies are going to see more pain before things get better.
But if China cuts production faster than expected, the steel sector might end up being a good investment. So, it’s a sector worth watching.
To get exposure to the steel market, either now or later, try the Market Vectors Steel ETF (NYSE; ticker: SLX). It gives wide exposure to global steel companies like Rio Tinto, Vale, and Arcelor Mittal. It’s up 40 percent since the beginning of the year – but down 11 percent from one year ago, and down 55 percent from five year highs.