Southeast Asia's Appetite For Steel Giving New Life To Chinese Mills

25 October 2016

China’s steel juggernaut is picking up speed closer to home.

As governments in Europe and the U.S. limited supplies of Chinese metal they said was dumped on the market, the world’s largest producer is expanding exports to its neighbors in Southeast Asia. A third of all Chinese shipments now end up in countries like Vietnam, Thailand and the Philippines, where rapid economic growth is fueling increased spending on infrastructure including highways, airports and office towers.

Southeast Asia’s growing appetite for steel is helping to ease the pain of a global surplus that sent prices plunging last year. It is giving new life to unprofitable government-owned mills that China had sought to close. But rising imports also are overwhelming smaller producers in Southeast Asia, while posing longer-term competition for high-end steel products made in Japan and South Korea as China pursues a bigger role in the region’s economy.

“Imports are coming by leaps and bounds,” said Tan Ah Yong, secretary general of the Southeast Asia Iron & Steel Institute, an industry group based in Selangor, Malaysia. “We are very worried. The change has not really benefited regional steel producers.”

There already are signs that cheap Chinese supply has stymied the growth of Southeast Asia’s steel industry. While demand by the region’s six top steel-using countries surged 23 percent from 2011 to 2015 to 69 million metric tons, domestic production barely budged, association data show. In Malaysia, Perwaja Steel Sdn Bhd and Megasteel Sdn Bhd have been forced to close their operations, and domestic producers in Southeast Asia have postponed investment in new capacity, Tan said.

Biggest Driver

Ten nations in Southeast Asia accounted for 37 percent of China’s steel exports in the first nine months of 2016, up from 32 percent a year earlier, and 20 percent five years ago, according to Chinese General Administration of Customs data. Southeast Asia has been by far the biggest driver of the increase in Chinese shipments, accounting for about two thirds of last year’s gain and almost all of it this year.

China makes half the world’s steel and has been sending more overseas as its domestic capacity rose faster than demand. Global shipments more than quadrupled since the 2008 financial crisis, reaching a record last year, and prices dropped as much as 64 percent from a peak in 2011. While the market recovered some of those losses this year as Chinese demand improved, the prolonged surplus has forced mills to close across five continents.

To be sure, even before the tariffs were imposed, western countries weren’t major destinations for Chinese steel. Less than 1 percent of exports went to the U.S. in the first nine months of 2016, the lowest in five years, and less than 6 percent ended up in Europe, government data show. Those shipments are shrinking as sales jump in Asia, where China’s government seeks more economic and trade clout. Southeast Asia was the biggest source of new demand in the past five years.

Global Exports

“There have been many anti-dumping cases which have been successful, but while deterring some exports, it certainly won’t derail the whole theme of Chinese steel mills exporting to the world,” said Daniel Hynes, senior commodities strategist at Australia & New Zealand Banking Group Ltd. in Sydney.

For now, cheap supply has been a boon to buyers in Southeast Asia, where infrastructure spending is expected to expand through the rest of this decade. Vietnam’s economy will grow 6 percent this year, as the Philippines expands 6.4 percent and Indonesia 5 percent, according to economists surveyed by Bloomberg.

China is seeking a bigger role in the economies of its neighbors under a policy called One Belt, One Road, which aims to stimulate new trade links. The government also is funding projects in the region through the China-led Asian Infrastructure Investment Bank to develop more markets for its exports.

Philippine President Rodrigo Duterte, during his visit to Beijing last week, got $24 billion of investment and funding pledges from China, including $11.2 billion of preliminary agreements for projects including railways, ports and energy projects.

Adding Value

The evolution of China’s steel industry may pose a longer-term headache for producers elsewhere in Asia. While most of China’s exports are commodity products commonly used in construction, mills are investing and exporting more higher-end steel like coated sheet and rolled coil used in manufacturing.

Baosteel Group Corp. and Wuhan Iron & Steel Group Corp., who are merging under a state-directed plan intended to consolidate the industry, are building two huge plants on the south coast of China, each with nearly 10 million tons of capacity. These are low-cost, high-quality plants designed to serve domestic markets as well as those elsewhere in Asia, said Laura Zhai, an analyst at Fitch Ratings Inc.

“Where Japan and Korea have already been displaced is the kind of middle-of-the-road flat products like re-rolling grades of hot-rolled coil,” said Tomas Gutierrez, an analyst at Kallanish Commodities Ltd. in Shanghai.
Market Share

Such incursions pose a danger for more established companies in the region including Nippon Steel & Sumitomo Metal Corp. and JFE Holdings Inc., Japan’s top two producers, or South Korea’s Posco.

While competition is sure to increase, the influx of Chinese supply may have limited impact on markets for higher-end steel, especially from Japanese or Korean manufacturers with operations in Southeast Asia, said Risaburo Nezu, a senior research adviser at the Research Institute of Economy, Trade and Industry in Japan.

“I question if Japanese manufacturers will shift away from Japanese steel in favor of Chinese steel,” Nezu said. “I don’t know how realistic that possibility is.”


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