Statistics from the National Bureau of Statistics (NBS) show that investment in infrastructure in the first two months this year had generally dropped.

Investment in the railways in the period fell 44.4% y-o-y and investment growth in public facilities saw a negative growth rate of 4.3%. Road investment also saw a negative growth rate, of 8.7%. The property market data suggested that the investment in the property market would be likely to face the risk of a drop in the market.

Looking beyond the market fluctuations, China’s iron and steel industry is troubled by three structural problems: over-supply; a low degree of consolidation and an imbalance in geographic locations.

The deviation of production capacity from market demand has caused an unsustainable development of China’s iron and steel industry bringing down its profitability. The supply of flat products far exceeds that of long products after a dramatic production expansion of flat product capacity during 2006-2010. By the end of 2010, the situation aggravated, leaving a high inventory level and low prices for sheet products while long products continued in demand with higher prices because of undersupply.

The imbalance in supply & demand, plus an overall incompetence in price leverage of key raw materials, allows little room for market self-regulation of China’s iron and steel sector. The structural flaw provided opportunities for a great number of small and even micro-sized steel mills to survive.

In 2011, the 77 members of The China Iron and Steel Association (CISA) saw only an average 6% y-o-y growth in steel output. But output from smaller steel mills in the same period, which are local and not registered with the CISA, enjoyed a growth of more than 30%. As long as China’s fast urban expansion feeds the long products market, smaller mills will be able to survive and thrive, and do better than large enterprises, noted the head of a privately owned steel plant.

The north of China has long enjoyed a much faster expansion of steel production, and is home to many leading steelmakers such as Hebei Iron and Steel, Baogang, Anshan Iron and Steel and Shougang Group. Industry insiders dubbed the unhealthy layout as ‘Glut in North, Scarce in South’, and the structural difference between the northern and southern regions also gives rise to high distribution costs.

To tackle this geographical imbalance, many expect the country’s vast western area would be a major development focus for China’s steel production. However, as the east coast will remain a main region of consumption, the industry’s westward movement has to take into account the need to import iron ore and cost to transport this west.


Source: China Metals e-mail chinametal@xinhua.org