Abstract
The chief problem facing the Chinese metallurgical industry is over-capacity
and the fragmentation of a
large portion of production in the hands of a
multitude of small producers; a situation which is
undermining Chinese
firms’ leverage over costs and causing product price volatility,
according to BMI’s
China Metals Report.
China has around 700
steelmakers, and the industry is highly fragmented. In the face of the
current
downturn in steel prices, China is promoting consolidation to
achieve a more disciplined steel market
with improved leverage and
bargaining power with iron ore miners, as well as preventing
over-capacity.
Many analysts believe the top 10 Chinese steelmakers will
have to achieve a 70% market share to control
prices, compared to the
current 42%. Consolidation is likely to lead to the elimination of surplus
capacity
which is dragging down steel prices, with smaller mills likely to
close. By 2009, China’s over-capacity
was estimated at around 100mn
tonnes per annum (tpa). The problem of fragmentation of ownership is
also
witnessed in the aluminium industry. By 2009, China had 15.65mn tpa of
aluminium smelter
capacity, of which small-scale smelters represented 48%.
Consolidation has occurred, with 12 aluminium
producers merging to form
market-leader the Aluminium Corporation of China (Chinalco) in 2001.
However, further consolidation is required to create producers large enough to
maximise efficiency, lower
costs and dictate market prices.
The need
for consolidation and streamlining is more evident as the metals industry has
slipped into
recession. In 2008, the boom in the Chinese metallurgical
industry came to an abrupt end. Output peaked
at an all-time high of
46.94mn tonnes in June but by Q408 production had plummeted to levels not
seen
for over two years, and down 11.7% year-on-year (y-o-y) on Q407. A
similar trend was witnessed in
primary aluminium production, which was
down 11.1% y-o-y.
With domestic steel demand set to decline and exports
likely to fall, Chinese steel output will be lower
than in 2008 –
BMI forecasts a 16.9% fall to 414.6mn tonnes. Flats are set to fall faster
than longs. While
a steep decline in construction activity will depress
demand for longs, this will be partly offset by statefunded
infrastructure
projects, which amount to around 50mn tonnes of steel. Other manufacturing
industries such as the automotive sector and household appliances, which
require flat products, will
witness a rapid downturn. BMI expects a drop
of around 12% in flats demand, leading to an 11.5mn
tonnes fall in demand.
As a result of anticipated closures of smaller plants, the recovery in
steel
production will be at a far lower growth rate than seen in recent
years, with BMI forecasting growth of
4.5% in 2010 and in the 5.6-6.6%
range in the following three years, totalling 520.2mn tonnes by 2013, a
4.2% increase on 2008.
In 2009, China will produce aluminium at below cost
due to over-supply. The break-even point for
Chinese aluminium production
is US$2,000 per tonne, twice the level achieved in neighbouring India. At
the same time, the aluminium industry will be faced with the same problems as
the steel industry in terms
of over-capacity, with demand falling well
short of capacity. A key issue is the reduction of electricity
prices,
with power representing 40% of the total cost of primary aluminium production
in China,
compared to the global average of 25%. As a result of falling
demand, aluminium output was
progressively cut from September 2008 and by
March 2009 production had been cut by 3.5mn tonnes.
In turn, alumina
output was cut by about 9.6mn tonnes.
On the basis of trends within the
automotive and household appliance industries, BMI forecasts a 19%
fall in
aluminium output to 9.8mn tonnes. We expect consolidation within the Chinese
aluminium
industry as a result of the collapse in both domestic and export
demand, leading to the closure of smaller
smelters – representing
48% of capacity by January 2009. As such, 2008 levels are unlikely to be
reached
until 2013, with a sluggish recovery.
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