Fosun International’s chairman Guo Guangchang’s light-hearted assertion that his company is moving into insurance because ‘other industries are sexier than steel’, points to a more serious problem within the Chinese steel industry, which is beginning to have repercussions for ‘sexier’ parts of the economy.
Analysis by MEPS International points to a gradual decline in the share of total fixed asset investments taken by the steel industry. This has been falling since 2009, from 2.5% of total investment to a low of just 1%. As well as the inherent ‘unsexy’ nature of the steel industry, this trend is partly the result of central government policy. Under its Steel Industry Development policy the government has sought to boost investment in higher value flat product mills, whilst restricting investment in production of low value steel used in construction.
Domestic demand for flat steel products has not kept pace with capacity expansions, however, and these mills are struggling with low profit margins. This has discouraged further investment. Consumption of construction steel, on the other hand, had soared in recent years as, initially China’s fiscal stimulus plan and then its ambitious economic housing project pushed up building activity.
The lack of investment in capacity to produce construction steel is now leading to undersupply of this material and prices have risen sharply relative to flat products. MEPS forecast that the 2011 average price of rebar, used in construction, will rise 17% from 2010, to RMB 4700/tonnes ($735). This compares with a forecasted 12% rise in the average price of hot rolled coil in 2011.
This is causing problems for those ‘sexier’ industries. MEPS estimate that, on average, the construction industry is currently paying 16% more for steel than it did last year, pushing up costs and selling values in the real estate sector. As Mr Guo Guangchang seeks to source office space for his new insurance venture, he will do well to remember that the exorbitant rent he will have to pay is in part due to his and others dereliction of the steel industry.