China’s Steel Demand Falls

30 January 2015

China’s demand for steel likely flatlined or even contracted last year, the first time in 14 years the measure hasn’t expanded for the world’s largest steel user.

Officials with the state-backed China Iron and Steel Association said Thursday that apparent steel consumption, a measure of demand calculated by deducting exports from the sum of production and imports, posted a 3.4% decline last year from 2013.

The decline is a sharp reversal from the 6% growth posted a year earlier, and undershot state forecasts from a year ago that projected growth in the low-single digits. It also sits against the backdrop of a broader slowdown in China, where growth hit its slowest rate in more than two decades at 7.4% last year. Sectors that consume steel, principally real estate, are largely to blame.

Recently, China has taken steps to shift from an investment-driven economy, which favors heavy industry, to a consumption-driven one. “What steelmakers have to realize is that the structural changes in the economy have brought about slower demand for steel products, and our industry hasn’t reformed enough” to meet these pressures, Zhu Jimin, executive vice chairman of the steel association, said at a conference.

Another sign of slowdown, the China Coal Industry Association forecast that coal output likely fell 2.5% last year. The association earlier said that data for the first 11 months showed a 2.1% decline in production from 2013.

Apparent steel consumption doesn’t take into account China’s massive steel inventories. Factoring in still-incomplete data on those inventories, it’s likely that real consumption stayed flat or slightly declined, Mr. Zhu said. As production slowed last year, he said, mills in 22 key steel centers around the country had drawn down inventories to 8.3 million metric tons by December, the lowest such level in four years.

The slowdown in the steel sector comes as economists warn that China may be nearing “peak steel,” a theoretical point in time when the nation’s demand for steel—once so insatiable that it was home to half the world’s steel factories—enters a long-term decline.

The U.S., for example, reached that point in 1972 at 150 million tons. “Using this analog as a guide, it could follow that China’s demand will peak at 0.7 ton per head or about 1 billion tons,” Richard Campbell, executive director of Peninsula Capital Management, said.

By this latest measure, China has already passed that point.

A 3.4% decline in steel consumption would place China’s current demand volume at 738 million tons, according to official data. Slowing beyond this point portends lower output and tighter employment, as steel jobs begin to shift overseas where costs are cheaper.

The economic restructuring that has helped turn China into a consumption-led economy—from reforming the state-owned sector to improving China’s social safety net—partly requires shaking off years of debt-driven overcapacity in major industries like steel and coal.

Coal production is less indicative of how much the economy is using the commodity than consumption. Still, analysts say the latter is also heading downward. Data may be released on consumption later this year.

The steel association didn’t offer a forecast for 2015. But Mr. Zhu warned of gloom for the industry as it continues to undertake painful restructuring to hive off excess capacity accumulated over decades of China’s breakneck economic growth. China cut 31.1 million tons of steelmaking capacity last year, exceeding its target of 27 million tons, its industry ministry said this week.


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