China in Transition

China as the World's Largest Steel Producer: Decline in demand prompted by correction in the country's real estate market may drag the global economy

Chi Hung KWAN
Consulting Fellow, RIETI

Demand for steel is stalling in China as a correction gathers momentum in the country's real estate market. As China is the largest steel producer in the world, accounting for about half of global output, this situation is causing repercussions not only in China but also in other countries through inter-industry linkages.

Crude steel produced in China reached 779 million tonnes in 2013, accounting for 48.5% of the total global output of 1,606 million tonnes in that year (Table 1). Six Chinese manufacturers find themselves on the list of the world's top 10 steel companies (on a production basis). They include the Hebei Steel Group (third), the Baosteel Group (fourth), the Wuhan Steel Group (fifth), the Shagang Group (seventh), the Ansteel Group (eighth), and the Shougang Group (ninth) (Table 2). The iron and steel industry ranks with electronics, chemicals, and machinery as China's key industries, with operating income reaching 8,860 billion yuan, or 15.6% of the country's gross domestic product (GDP) in 2013 ("The State of the Iron and Steel Industry in 2013," released by the Ministry of Industry and Information Technology in February 2014).

Table 1: World Top 10 Crude Steel Producing Countries (2013)
RankCountryCrude steel production
(million tonnes)
Share (%)
3United States86.9 5.4
6South Korea66.14.1
Total (Including others)1606.0 100.0
Source: Compiled by the author based on World Steel Association, "World Steel in Figures 2014"
Table 2: World Top 10 Steel Companies (2013)
RankCompanyCrude steel production
(million tonnes)
2Nippon Steel & Sumitomo Metal Corporation50.1
3Hebei Steel Group45.8
4Baosteel Group43.9
5Wuhan Steel Group39.3
7Shagang Group35.1
8Ansteel Group33.7
9Shougang Group31.5
Source: Compiled by the author based on World Steel Association, "World Steel in Figures 2014"

The driving force behind China's steel output is domestic demand. Steel consumed by downstream Chinese industries amounted to 686 million tonnes in 2013. By industry, the construction industry consumed 380 million tonnes of steel (55.4% of total consumption), the machinery industry used 144 million tonnes (21.0%), and the automobile industry consumed 47 million tonnes (6.9%) (Table 3). Among these industries, construction accounted for more than half of the steel consumed in China. Steel consumption has grown rapidly in China's automobile industry, reflecting a surge in the number of vehicles sold in recent years. However, the industry's share of total steel consumption is still low, compared with the construction industry.

Table 3: Steel Consumption in China by Industry (2013)
(million tonnes)
Consumer electronics101.5
Total (including other industries)686100.0
Source: Compiled by the author based on "The State of the Iron and Steel Industry in 2013" released by the Ministry of Industry and Information Technology (data used in this material are estimates produced by the China Metallurgical Industry Planning and Research Institute)

China's iron and steel industry has strong links with upstream industries, such as the iron ore and energy industries, located upstream. In the first place, China is the world's largest importer of iron ore, accounting for two-thirds of the global import market for the material, even though it is also the largest iron ore producer in the world (World Steel Association, "World Steel in Figures 2014," released in May 2014). The iron and steel industry is also the biggest consumer of electricity in China, accounting for 10.2% of electricity consumed in the entirety of China and 14.0% of electricity used by the country's secondary industry (both figures are based on data for the period from January 2014 to May 2014, taken from "Summary of Electricity Industry Operation in January-May 2014" released by the China Electricity Council) (Note 1). Moreover, electricity consumption shows high elasticity to steel production. Reflecting this tendency, a strong link has been observed between electricity generation and crude steel production, with electricity generation rising faster (slower) than the economic growth rate when crude steel production growth surpasses (falls below) the economic growth rate (the real GDP growth rate). (Figure 1) (Note 2). Growth in electricity generation has recently fallen below the economic growth rate as crude steel output stalls.

Figure 1: Changes in Real GDP, Crude Steel Production, and Electricity Generation in ChinaFigure 1: Changes in Real GDP, Crude Steel Production, and Electricity Generation in China
Note: Figures for 2014 are for the first quarter only.
Source: Compiled by the author based on China Statistical Abstract 2014 released by the National Bureau of Statistics of China, and "Economic Development in the First Quarter of 2014: Stable and Sound," which the National Bureau of Statistics of China released on April 16, 2014

Compared with domestic demand, China's steel exports and imports are relatively modest. Nonetheless, China was the largest steel exporter and the sixth largest steel importer in the world in 2013, with exports and imports amounting to 61.5 million tonnes and 14.8 million tonnes, respectively (World Steel Association, "World Steel in Figures 2014"). There was, however, a huge difference in the per-tonne prices of steel China exported and imported in 2013. The price of exported steel was $854 per tonne and $1,211 per tonne for purchased steel ("The State of the Iron and Steel Industry in 2013," released by the Ministry of Industry and Information Technology in February 2014). This disparity reflects the fact that China mainly exports steel that is low in processing levels and technological content, and imports steel with higher value added. Thus, while China has become the largest producer of steel, it is still far from being a great steel power.

The iron and steel industry is vital not only for China but also for the world and has strong links with other industries. Thus, changes in China's steel market have significant implications on the performance of many multinational corporations and, by extension, the economies of other countries. First, China is both a competitor and an important market for steel companies in other countries. Second, market conditions in China's steel industry greatly affect exporting companies in resource-rich countries through the demand for, and by extension, the prices of such resources as iron ore and coal. In addition, the transportation of iron ore and coal has been a major source of revenue for shipping companies, and trends in shipping of these resources have been the most important factor in determining ocean freight.

Until recently, the construction boom in China has driven the global economy through brisk demand for steel. However, led by the housing market, the real estate market in China has been in a correction phase since early 2014. Reflecting this change, steel production and electricity generation growth rates have slowed in China. Prices of iron ore and coal, as well as the Baltic Dry Index, have weakened in international markets, too. The correction of China's real estate market is set to continue for some time to come. This will act as a factor delaying the global economic recovery, not only through a slowdown in China's economic growth but also through a slowdown in steel production.

The original text in Japanese was posted on July 11, 2014.

  1. ^ Along with the railway cargo volume and bank loans, Chinese Premier Li Keqiang has positioned electricity consumption as one of the three most important indicators (collectively known as the Li Keqiang Index) in judging business conditions in China.
  2. ^ Some observers question the credibility of GDP statistics because of the discrepancy between the electricity consumption growth rate and the economic growth rate (real GDP growth rate). However, in addition to the economic growth rate, changes in the composition of GDP, the weight of steel and other heavy industries in particular, also have a significant impact on electricity consumption. Thus, the discrepancy between the electricity consumption growth rate and the economic growth rate does not necessarily mean that China's GDP statistics are grossly inaccurate.
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July 11, 2014