China has dominated the steel sector for more than 30 years. Between 1980 and 2011, annual output expanded by 832Mt . Of that increase, China’s share was 648Mt – or 78%.

The situation is even more dramatic if we consider world iron-making over the period. In 1980, China produced 38Mt of pig iron out of a world total of 493 (7.7%). In 2011, China’s total was 630Mt from a global figure of 1078Mt (58.5%).

This year, the Chinese steel mills will contribute 46% of the world’s output. This figure could be higher if account is taken of under-reporting of production.

The operations of the Chinese steel sector differ from those in most other parts of the world. Firstly, much of the industry is under state control. In the 1980s and 1990s, governments in many western and eastern countries privatised their steel industries to rid them of bureaucracy and enable rationalisation within the sector.

Secondly. the steel supply mechanism in China is quite different to that in western countries. It is littered with numerous trading companies – some say, as many as 250000 still exist. These vary from major distributors, and trading houses to ‘one family businesses’ buying and selling material to small outlets.

In China, business between the steel industry and state owned utilities and major private companies is often conducted between the parties. However, there is little connection between private sector steel users and the steel mills in China. This lack of customer contact, coupled with speculation in the markets, often leads to excessive inventories at the steel mills and at the distributors.

Thirdly, the steel market is extremely fluid. Prices are changing on a regular basis. Market prices are published daily by research organisations. These are used to set contracts between buyer and seller. Down payments are necessary to secure deals. This is quite different from the west where most of the sales to customers are made by the mills direct to end-users or through ‘mill-owned’ distributors. There is a place for local distributors in the west. In most cases, however, they add value by slitting, cutting to size etc.

The supply chain from the steelmaker to the end-user in China is long. Material is handled many times before being delivered to its final customer. Consequently, the price paid by the steel user can be significantly inflated in relation the ex-mill selling price.

Source: MEPS China Steel Review Source: MEPS