China’s Steel Production Has Peaked, Warns Official

12 September 2016

The head of China’s top planning body for its metals industries, Li Xinchuang, has told The Australian that the country’s steel production has already peaked — in 2014.

This poses a big challenge for Australia — with exports to China of iron ore, a key steelmaking component, were worth $39 billion in 2015 — several times greater than any other single product sold to any other country.

Mr Li is the president of the Beijing-based China Metallurgical Industry Planning and Research Institute, an influential body which reports directly to the State Council or cabinet, and is also a professor of engineering.

He forecasts that the ore price will remain between $US50 and $US60 “for a long time”.

He says the relationship between China and Australia is crucial since China is the biggest producer and consumer of steel in the world, and Australia supplies it with the most iron ore.

Mr Li described as “ridiculous” Canberra’s anti-dumping measures against Chinese steel exports, asking: “Does your ­government want us to stop importing ore from Australia?”

He also lambasted the government’s recent vetoes on Chinese investments, saying it had become unpredictable: “That’s not big-country behaviour, it’s small-country behaviour.”

Mr Li said the dynamics of the relationship with Australia had changed since 2008, because of the impact of slowing global growth.

China produces about five times more steel annually than the European Union, and about seven times more than Japan, the next biggest national producer. In 2013 its output was 779 million tonnes, in 2014 823 million tonnes, and in 2015 804 million tonnes.

Australia produced 5 million tonnes last year.

Most of China’s steel — about 55 per cent of total output — is consumed by buildings and infrastructure, whose demand is closely linked with investment growth.

The other major sector buying steel is manufacturing, including ship building and carmakers, which has been most severely hit by the downturn, both within China and internationally.

Mr Li revealed that real consumption of steel in China had fallen 700 million tonnes since peak production in 2014, down 5.5 per cent in 2015 year-on-year and then falling a further 3 per cent in the first half of 2016, compared with the same period in 2015.

It was thus vital for the industry, he said, to keep exporting.

In 2015 China exported 112 million tonnes, and in the first seven months of this year, 67.5 million tonnes — 8.5 per cent up on the same period of 2015. It now sells 15 per cent of its steel overseas, compared with Japan selling 40 per cent, according to Mr Li.

Overall, steel production continues to decline and is down 0.5 per cent in the first seven months of 2016 year-on-year.

Mr Li said this fall came because China’s own consumption declined by 3 per cent, and he anticipated this trend would continue. Steel production would have fallen further if exports had not risen, also in the first seven months of 2016, by 8.5 per cent.

China’s imports of iron were still growing by 8.1 per cent in the first seven months to a total of 582 million tonnes. It now buys 60 per cent of the global ore output.

Mr Li ascribed this import growth chiefly to the continuing success of the big four miners — Brazil’s Vale and Australia’s Rio Tinto, BHP Billiton and Fortescue Metals Group — in cutting the cost of production. This has driven China’s own increasingly expensive ore mining operations to cut its output. “Even with a lower price of ore,” Mr Li said, “the Australian and Brazilian miners are still ­making big profits”.

The big four, he said, control 80 per cent of the internationally traded iron ore market.

Mr Li is concerned that the global economy might begin to shrink: “World consumption of steel is shrinking, though not too rapidly”. The chief challenge, he said, was China’s own fall in consumption, driven by the changing structure of the Chinese economy.

“Previously its growth was driven by investment, now by consumption and the services sector.” As a result, the Chinese steel market was now shrinking more than that of the rest of the world.

Mr Li said the problem with global oversupply of iron ore would become “more serious, with new mines still coming on stream and Chinese consumption falling”. Increased recycling in China was also cutting into the ore market, with steel companies investing more in obtaining and refining scrap.

While 80 per cent of Australia’s ore exports go to China, China buys 65 per cent of its imported ore from Australia.

“So neither can become independent of the other,” Mr Li said.

“The countries should pay more attention to each other.”

He would like to see the economic relationship intensify, to help create “long-term stability between the two countries”.

But, he said, “it’s now not so easy to invest in Australia. You change your mind about investments in the morning, and again in the evening”.

“So it’s not easy for Chinese companies to make the decision whether or not to invest there. Most of our people are not very happy about your policies changing too quickly; nobody can follow what you’re doing.

“Yet the mining industry requires policies for the long term, because investments in it involve a lot of money.”

Maintaining consistent policies mattered much more, he said, “now we are virtually economic zones of each other. You should develop and implement a long-term strategy”.

He said Australia’s imposition of anti-dumping measures created “a terrible situation”.

China, he said, imported a lot of Australian iron ore and exports a small amount of steel, yet was challenged by anti-dumping legislation, as in the US and Europe.

Duties of up to 53 per cent of the export price were introduced by the Turnbull government in April on Chinese steel imports.

“It’s ridiculous,” Mr Li said. “It’s terrible … I don’t know what your government’s idea is. Is it to make trouble?”

China’s steel industry would survive without the Australian market, he added. And it could ­import ore from elsewhere.


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