Worldwide steel mills have reached a total estimated supply capacity of 1.8 billion tons, vs. a steel global demand of only 1.5 billion tons. Like Europe, China produces too much steel and it must restructure its industry.
Over the last 10 years, when steel production increased by 20% in Europe, it went up by 534% in China which now produces nearly half the world’s steel vs. 18% in 2001. The growth of the Chinese steel industry corresponds to the rapid development of the construction and infrastructure industry. Since 2008, the sector has also been heavily subsidized by the Chinese public banks.
Today, China‘s economic activity has not contracted like in Europe but the Chinese real estate bubble deflated and since the construction industry consumes half of Chinese steel, China, while not in crisis, has the same steel overcapacity issue as Europe. Last year, 8% of the production was not sold. Although China has three of the ten world biggest steel companies, its production is fragmented into thousands of small foundries, many of which are now on the brink of bankruptcy.
One of the objectives of the five-year plan published last year is to limit the number of furnaces. Also, China wants to meet the expected increase in demand for consumer goods – cars, electronics and appliances – from a middle class that could represent two-thirds of the population in 2030 vs. less than a 30% today. This is why China wants to move upmarket in its quality of steels, like special steels which are now imported from Germany or South Korea. This will require heavy equipment investments. In short, the Chinese steel industry is at a crossroads.