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    China steel –_embracing_a_new_age_16_09_12_13_19 (1) China steel –_embracing_a_new_age_16_09_12_13_19 (1) Document Transcript

    • | Global Research | 22:30 GMT 16 September 2012 | China steel – Embracing a new age Highlights • China‟s steel industry will undergo structural change over the next decade – demand from the manufacturing sector is likely to increase rapidly, taking share from the construction sector, the main driver of steel demand in the last decade. Steel mills should act now to review their operations and restructure to improve profitability. • Judy H Zhu, +86 21 6168 5016 Judy-Hui.Zhu@sc.com Koun-Ken Lee, +65 6596 8256 KounKen.Lee@sc.com Wei Ouyang, +852 3983 8519 Wei.Ouyang@sc.com Our model shows that China‟s steel consumption will continue to grow until 2025, five years beyond the market consensus of 2020. Current steel capacity is insufficient to support long-term demand. Hence, we expect further capacity expansion in China. • New investments should move away from the currently dominant basic oxygen furnace (BOF), which uses iron ore as its main feedstock, towards the electric arc furnace (EAF), which uses scrap, is cheaper and takes less time to build. • Over the next decade, southern and western China will likely see increased steelmaking capacity. Northern China, which currently has the largest capacity, will have limited room to grow. Steel mills will be able to improve profitability by expanding in the south and the west. We expect longterm capacity utilisation to stay close to 90%. • China‟s iron ore imports are unlikely to peak until 2025, as declining domestic ore grades will lead to a higher dependence on imports, providing long-term support to prices. Forward prices do not accurately reflect such demand, in our view. Important disclosures can be found in the Disclosures Appendix SCout is Standard Chartered‟s premium research product that offers Strategic, Collaborative, Original ideas on Universal and Thematic opportunities
    • All rights reserved. Standard Chartered Bank 2012 research.standardchartered.com
    • China steel – Embracing a new age Table of contents Summary Hedging and trade recommendations 5 Section I – Steel consumption to grow for another 13 years 6 Section II – Positioning for an evolving demand landscape 14 Section III – Inevitable restructuring of the steel industry 23 Section IV – Steel growth provides long-term support for iron ore 28 Appendix I: The process of steelmaking and finishing 32 Appendix II: World’s top steel producers in 2010 33 References 16 September 2012 3 34 2
    • China steel – Embracing a new age Summary Now is the time to review and restructure We expect the manufacturing sector to become a more important steel consumer in the long term Our model suggests that China’s steel consumption will not peak until 2025, five years later than market consensus Current steel capacity is insufficient to support long-term demand; we support further selective expansion China‟s steel market will change structurally over the next decade. In our view, the current production infrastructure means that China‟s mills are not positioned to capture the best returns. Construction demand, while still dominant, will see its share decline from 2014. Manufacturing-sector demand will increase rapidly. Scrap steel availability should improve as the economy matures. Thus, new mill investments are likely to move away from basic oxygen furnaces (BOF) towards electric arc furnaces (EAF), following the path taken by steel mills in developed economies. Following a well-trodden path We believe investment decisions today should incorporate our view that Chinese steel demand growth will continue up to 2025 – a good five years beyond the general market consensus of 2020 (Figure 1). We have analysed the change in consumption patterns of large developed and developing economies, referring to some data going as far back as 1900. The reasonably high correlations between our regression model and the data sets suggest that steel consumption in large countries over the course of their development – specifically, the relationship between per-capita steel consumption and per-capita GDP in real terms – follows a similar trend. We are confident that utilisation rates will remain high Another major change in China‟s steel manufacturing landscape over the next decade is the rebalancing of capacity, currently concentrated in the north. This shift will be driven primarily by government incentives, and mills will be able to improve profitability by expanding in the south and the west. We acknowledge that China‟s current steel capacity exceeds domestic demand, but our view of long-term demand growth supports further selective expansion. Our analysis shows that steel capacity utilisation will remain high, averaging close to 90% over the next decade. Hence, while we recognise that the current outlook for China‟s steel industry is pessimistic, we believe this is temporary and that demand growth will outpace supply growth from 2015. Figure 1: The peak of China’s steel consumption Figure 2: The peak of China’s iron ore demand and import 1970-2030 mt, 2008-26 0.60 0.50 0.40 0.30 900 Steel consumption per capita, tonne 800 0.20 0.10 0.00 1,000 700 Total steel consumption, million tonnes (RHS) 1,100 900 600 500 400 300 800 700 600 200 Our forecasts 500 100 400 0 300 Import, total weight Demand, Fe content
    • 1970 1976 1982 1988 1994 2000 2006 2012 2018 2024 2030 Sources: WSA, IMF, Standard Chartered Research 16 September 2012 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 Source: Standard Chartered Research 3
    • China steel – Embracing a new age Forward prices for iron ore do not reflect China’s long-term demand China’s iron ore imports will peak in 2025, providing long-term support to prices We remain long-term iron ore bulls – underpinned by demand in China. We expect China‟s iron ore imports (by weight) to peak only in 2025 (Figure 2). We have lowered our 2012-15 iron ore price forecasts (62% iron content, on a cost and freight basis at China‟s Tianjin port) as follows: 2012 to USD 127/tonne (t) from USD 143/t, 2013 to USD 135/t from USD 182/t, 2014 to USD 125/t from USD 180/t, and 2015 to USD 115/t from USD 133/t. However, our long-term price forecasts are unchanged, supported by escalating costs. We believe that forward prices, which are quoted in a range of USD 90-94/t for delivery throughout 2015, do not yet fully factor in long-term demand from China. 16 September 2012 4
    • China steel – Embracing a new age Hedging and trade recommendations We see an upward bias to iron ore price risks in Q4 Figure 3 shows our price forecasts for iron ore with 62% iron content, on a cost and freight basis at Tianjin port. An arithmetic average of prices is traded on the Singapore Exchange (SGX). In our latest report on iron ore (On the Ground, 24 August 2012, ‘Iron ore – Cast-iron proof of slow demand’), we lowered our Q3-2012 price forecast (period average) to USD 110/t from USD 130/t to reflect a lower base in Q2 and our concerns about seasonal demand weakness. Our Q4 price forecast is USD 115/t. Between 5-11 September, iron ore prices (spot and swaps) rebounded by c.20% on expectations that China‟s economic growth might stabilise (rather than slow further) after Beijing approved new infrastructure projects. Although near-term steel demand has not improved, steel mills in China are likely to step up buying going into Q4, with steel output gradually ramping up in response to the seasonal improvement in demand. We also expect positive developments in the global economy in the latter part of H2 to provide upward momentum to iron ore prices. By the end of October, we expect prices to rebound to USD 120/t. Trade recommendations Producers The recent price rebound has provided some relief to producers at the high end of the cost curve, but current levels are still insufficient to enable all producers (particularly those in China with cash costs at USD 120/t) to be profitable. We expect China‟s iron ore demand to improve substantially from end-September, when steel mills‟ maintenance periods will end and they will ramp up production. However, iron ore demand is unlikely to surge for the remainder of this year, as we expect only a moderate recovery in China‟s economy/steel demand in Q4. We recommend selling in small volumes by targeting USD 120/t by the end of October. Consumers Our supply/demand balance forecasts for the seaborne iron ore market suggest that supply will remain tight this year, although the deficit will narrow as new supply exceeds new demand. We recommend that consumers buy forwards – namely October, November and December 2012 swaps – for delivery in Q4. These swaps are currently traded at USD 97/t, 16% below our Q4 forecast (period average). Further ahead, we recommend buying 2013 swaps that are traded at USD 99-101/t from January to December, 26% below our 2013 forecast. Figure 3: Our iron ore price forecasts USD/tonne Q2-2012F Q3-2012F Q4-2012F 2012F 2013F 2014F 2015F 2016F 2017F 2018F 2019F 2020F 2021F 2026F New 140 110 115 127 135 125 115 113 114 120 121 128 122 124 Old 150 130 160 143 182 180 133 113 114 120 121 128 122 124 *62% Fe content, cost and freight at China’s Tianjin port; Source: Standard Chartered Research 16 September 2012 5
    • China steel – Embracing a new age Section I – Steel consumption to grow for another 13 years • China’s steel consumption is likely to peak at 823mt in 2025 • Steel consumption per capita should reach 567kg in 2025 • We expect steel consumption to drop immediately after peaking The dragon lives Our model suggests that China’s steel consumption will peak at 823mt in 2025; consumption per capita should reach 567kg Over the last five decades, China‟s steel industry was part of the North East Asian miracle: its steel consumption surged from 3% of the world‟s total in the late 1960s to 42% in 2010, while its steel production rose from 3% to 44% of the global total over the same period (Figure 4). The highest growth in steel consumption and production has come in the last decade, when the country‟s annual GDP growth stabilised above 8% and urban growth created strong demand for the infrastructure development in rural areas. In the late 1990s, China surpassed the US as the world‟s largest steel consumer. Its consumption took off in 2000, and impressive growth has continued for a decade (Figure 5). While no market can grow forever, and the steel sector is particularly cyclical because it is closely correlated with the economic cycle, our research suggests that China‟s steel consumption will not peak until 2025. This is more bullish than many in the market expect. We use per-capita consumption as a benchmark to help forecast the peak. Our model suggests that China‟s per-capita consumption will reach 567kg in 2025. Total consumption will peak at 823 million tonnes (mt) in 2025, and will fall immediately thereafter. We provide long-term forecasts to 2030 in Figure 14. Since our model uses per-capita GDP as an input for our steel forecasts, these forecasts reflect the changing contribution from infrastructure build-out, as our economists‟ GDP forecasts take into account the contribution from investment (Figure 13). We expect investment to contribute 3.8 percentage points (ppt) to China‟s real GDP growth in 2016, down from 5.3ppt in 2011. Figure 4: China’s position in the global steel market Figure 5: Steel consumption in major countries % of global total, 1967-2010 mt, 1967-2010 40 35 Consumption 700 600 600 Production 45 800 700 50 500 30 500 25 400 20 15 Urban population, million persons (RHS) 300 200 10 5 100 0 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 0 Sources: WSA, CEIC, Standard Chartered Research China 400 300 Korea 200 Japan Germany US 100 0 1967 1972 1977 1982 1987 1992 1997 2002 2007 Sources: WSA, Standard Chartered Research
    • 16 September 2012 6
    • China steel – Embracing a new age Peak consumption is more than a decade away Our model uses data from comparable economies to run regression analysis and provide paths for per-capita steel consumption From 1970 to 2000, China‟s steel consumption rose by approximately 3.9mt per year. This growth accelerated from 2001 on the back of aggressive investment in infrastructure and real estate. Since then, the trend has shifted to growth of approximately 44.2mt per year. It is natural to question how long this level of growth can last. In this section, we attempt to provide an answer. Our key assumptions for the model In the absence of reliable data on China‟s infrastructure, we look to other countries for clues as to how China‟s steel consumption will evolve. We believe that infrastructure projects were the main demand driver of steel demand during the economic development stage in other countries, particularly those with similar geological conditions to China (the US) and a low infrastructure base (Japan). Our key assumptions are: 1. The future path of China‟s per-capita steel consumption will track the trajectory of major economies. 2. China‟s long-term real GDP growth will gradually trend down and stabilise at 4% y/y towards 2030. 3. to We use UN estimates for China‟s population. Population growth is forecast decelerate in the years leading up to 2030, reaching 1.46bn people by 2030. GDP has a profound relation with steel consumption GDP per capita is our forecasting measure A particularly compelling metric is per-capita steel consumption plotted against real GDP in US dollars per capita (see Figure 6; we use data from 1970, except for the US, which is from 1900). We use 2010 as the base year to calculate real GDP. The main reason why we link steel consumption to GDP is that GDP measures an economy‟s output of final goods and services. For large economies such as China (which overtook Japan in 2010 to become the world‟s second-largest economy after the US in nominal GDP terms), construction and manufacturing contribute heavily to economic output. Hence, GDP is related to steel consumption. Germany Malaysia 1.2 Japan US France UK China India Korea 1.0 Base case 0.8 0.6 0.4 0.2 0.0 0 10 20 30 GDP per capita, '000 USD Figure 7: We use this to derive our per-capita steel consumption paths for various scenarios Steel consumption per capita, tonne Steel consumption per capita, tonne Figure 6: Steel consumption per capita as a function of GDP per capita 40 50 China 0.9 0.8 0.7 Bull case 0.6 0.5 Base case 0.4 0.3 0.2 Bear case 0.1 0 0 5 10 15 GDP per capita, '000 USD 20
    • Sources: IMF, UN, WSA, Standard Chartered Research 16 September 2012 Sources: IMF, UN, WSA, Standard Chartered Research 7
    • China steel – Embracing a new age GDP per capita is a proxy for a country‟s standard of living (it is not a measure of living standards or personal income). A higher standard of living requires development of infrastructure and manufactured products. This includes building new houses, roads, railways, airports and bridges, as well as producing cars, white goods and more pipelines for energy transmission. All of these are steel-intensive. We did not use median household income to measure steel consumption per capita because (1) median household income is more a reflection of consumers‟ wealth, but does not necessarily correlate to consumption of steel-intensive products; and (2) median household income is a politically sensitive indicator that does not always positively correlate with GDP per capita. During recessions, median household income declines, while per-capita GDP continues to rise. We observed this in the US when the dot-com bubble burst in the early 2000s and when the global financial crisis began in 2008. Our analysis shows that fixed asset represent construction and is widely steel consumption – in fact has broad category and includes much investment investment (FAI) – which is commonly used to viewed by the market as closely correlated with a low correlation with steel, as FAI is a investment that is unrelated to steel (such as in land and technology). The relationship between steel consumption and GDP in Steel consumption per capita shows a linear increase as GDP per capita rises from a low base, before peaking major countries As economies develop, we see a steep linear increase in per-capita steel consumption as per-capita GDP rises from a low base. This is because infrastructure build-out contributes heavily to economic output (measured by GDP) during this development stage. When an economy matures, which is usually accompanied by the completion of infrastructure projects, its dependence on construction declines and it starts to rely more on domestic consumption. The latter requires more manufactured goods, which also consume steel, but in the form of highervalue- added steel products. Figure 6 shows that increases in per-capita steel consumption are particularly steep when per-capita GDP rises towards USD 5,000. Beyond the per-capita GDP level of approximately USD 5,000-10,000, the uptrend in per-capita steel consumption begins to peak. After this stage, scenarios differ among countries. The two cases that stand out are Japan and South Korea. Consumption has stayed high in both countries, with Japan‟s hitting a second peak at per-capita GDP of around USD 30,000, while South Korea‟s appears to be peaking at a per-capita GDP level of around USD 18,000. China has passed its fastest growth period and entered a slower growth phase China’s per-capita steel consumption will become inelastic to GDP China‟s per-capita steel consumption has risen particularly fast in the past 10 years, with infrastructure build-out and property providing the major momentum (in Section II of this report, we provide a long-term analysis of steel consumption by major sectors in China). Although we expect infrastructure to contribute less to GDP growth over the long term, and the contribution from domestic consumption to gradually increase, infrastructure will remain one of the most important economic growth drivers. Our view on China‟s steel consumption incorporates this expected structural shift in the economy. The trajectory for China‟s per-capita steel consumption derived from our regression analysis of various countries (Figure 7) shows that 2012 consumption, at 487kg, is already close to the peak of 569kg we forecast between 2022 and 2023. Our analysis
    • 16 September 2012 8
    • China steel – Embracing a new age also suggests that between 2012 and 2020, per-capita consumption will increase by 16%. But between 2020 and 2025, there will be virtually no growth in per-capita use, while total steel consumption (as shown in Figure 12) will continue to rise on the back of population growth. The flattening-out of growth in per-capita consumption implies that this indicator will have a looser relationship with per-capita GDP (also our observation from other countries‟ histories) over the next decade. It further implies that going forward, the contribution of infrastructure will be less important than during the initial acceleration phase. We believe the reasons for this are as follows: 1. China has experienced oversupply and low utilisation of infrastructure because of overdevelopment in the last 10 years. Thus, the pace of further development should slow, with less aggressive spending on new projects. 2. In the last 10 years China‟s urban population has increased rapidly, from less than 40% to 51% of the total population, generating huge demand for infrastructure and manufactured goods. Urban population growth should slow from here, contributing less to per-capita use of steel. Development in Japan (Figures 8 and 9) and the US shows a similar pattern In Japan, once the urban population reached 50% of the total (in 1968), the pace of urbanisation slowed significantly (from 1969-1982). Per-capita steel consumption peaked in the early 1970s, while urbanisation continued to trend up, albeit much more slowly. In the US also, we observe that per-capita steel consumption does not necessarily grow in line with urbanisation ad infinitum (Figure 10). In China, we expect demand for infrastructure projects to slow in the next decade. However, demand for manufactured goods should grow steadily despite the slowdown in the pace of urbanisation, as these goods have shorter lives. Japan and Germany show exceptionally high steel consumption Post-war reconstruction in Japan and Germany pushed up steel demand As Figure 6 shows, when per-capita GDP was below USD 5,000, Japan and Germany reported exceptionally high steel consumption per capita. In the 1950s and 1960s, both countries underwent reconstruction from a very low base after World War II. Germany‟s consumption returned to average levels after reconstruction, but Japan maintained momentum, exhibiting high ongoing percapita consumption as per-capita GDP grew. Figure 8: Japan’s steel intensity peaked when Figure 9: Japan’s urbanisation slowed significantly when urbanisation was still rising the urban population reached 50% Urbanisation, % of total population (RHS) 900 700 600 Steel consumption per capita, kg 500 400 80 900 70 800 60 800 700 50 40 30 300 Steel consumption per capita, kg 2.5 600 2.0 500 1.5 400 300 200 20 10 Growth of urbanisation, % y/y (RHS) 200 100 100 0 0 1950 1957 1964 1971 1978 1985 1992 1999 2006 3.0 0 1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 1.0 0.5 0.0
    • Sources: IMF, WSA, UN, Standard Chartered Research 16 September 2012 Sources: IMF, WSA, UN, Standard Chartered Research 9
    • China steel – Embracing a new age The history of steel consumption in Japan suggests that the country experienced a double peak. The first was in 1973, when per-capita use reached 802kg. The second was in 1990, when per-capita use reached a similar level after almost 20 years of volatility. We do not think Japan is a useful comparison for China (we have not included it in the base-case scenario discussed later) because its government implemented preferential policies to encourage the expansion of the steel industry and exports of steel-related products after the war. Therefore, its postwar steel consumption was not entirely related to domestic demand and was inflated by exports. When post-war construction was completed in the 1970s, Japan became a major exporter of automotive products (very steel-intensive). As of 2010, the automotive sector accounted for 22% of the country‟s total steel consumption. US experience provides insight to complete the picture US steel history shows how steel consumption shifts at different stages of development; this informs our analysis of China’s changing steel market in Section II On the other side of the spectrum, we have seen the US peak and decline. US percapita consumption also reached double peaks at per-capita GDP of around USD 30,000 (although the second peak was a little lower than the first). The US relied on infrastructure investment in its early years of development and became a consumption-driven economy later on. The history of the US railway provides a useful example of steelintensive infrastructure investment: 7,000 miles were laid in 1880, 9,000 miles in 1881 and 11,000 miles in 1882. Railways were the nation‟s first „big business‟ in the industrialisation period, and were almost the sole contributor to US steel consumption. But today, construction accounts for only 42% of US steel consumption (in comparison, auto and machinery-making account for 36% of US steel consumption). US steel consumption data from 1900-2010 shows that per-capita consumption first peaked at 528kg in 1968 and stayed around that level until 1973. When GDP per capita reached USD 45,000 in the 2000s, US steel consumption per capita dropped quickly. When a country‟s urbanisation rate reaches 80% (the US hit 70% in the early 1960s and 80% in the 2000s), construction should start to account for much less steel consumption, while the manufacturing sector (mainly householdrelated consumption) should outperform. Our long-term forecasts for steel applications in China (discussed in Section II of this report) draw on the experience of industrialised countries, including the US, to assume long-term trends for changes in steel use. Figure 10: US steel intensity has an inverse relationship with urbanisation 550 Steel consumption per capita, kg 85 500 80 450 400 75 350 300 250 200 150 70 Urbanisation, % of total 65
    • 100 60 1950 1957 1964 1971 1978 1985 1992 1999 2006 Sources: IMF, WSA, UN, Standard Chartered Research 16 September 2012 10
    • China steel – Embracing a new age South Korea is excluded owing to its shipbuilding industry South Korea’s shipping industry pushes up steel consumption per capita We include South Korea in Figure 6, but have not included it in any of our regressions (whereas other market analysis does). The country has the world‟s highest per-capita use of steel, at 1,117kg in 2010. It reported peak per-capita use at 1,257kg in 2008 (the same year that it became the world‟s dominant shipbuilder, with a 51% share of the global market). But in our view, Korea is not at all comparable with China because: (1) growth in the industrial sector was the principal driver of Korean economic development, and steel-intensive shipbuilding was a key contributor (while China‟s shipbuilding industry has grown rapidly in the last decade, it has contributed much less to the overall economy); And (2) Korea‟s population is roughly only 4% of China‟s. How does our model work? We have provided three scenarios for China’s steel consumption per capita Based on our assumptions and data, we construct regressions for three scenarios. The regressions are simple polynomial functions that are merely a way for us to interpolate a path for steep per-capita consumption and not a tool for extrapolating beyond per-capita GDP level of USD 50,000. Our base case uses data for China, Malaysia, the US and Germany only, which can be found in Figure 7. For our bear case, we omit Japan, Germany and Korea from the data set and rerun the regression (see Figure 7). For our bull case, we omit France, the UK, Korea 2 and the US. Goodness of fit (R ) for all cases ranges between 58% for the bear and base cases and 79% for the bull case. These fits are reasonable and allow us to infer a per-capita consumption level for a given per-capita GDP figure. The resulting regressions in Figure 7 are intuitive and provide us with sensible forecasting scenarios. The bear case reflects the path taken by the US from the 1970s to date, while the bull case is more in line with that taken by Japan and Germany during the same period. We plot these regression fits over China‟s historical per-capita steel consumption data and project forward out to 2030. The next steps involve translating these estimates into consumption numbers. This requires two further estimates, namely population and GDP per capita out to 2030; these estimates are the same in all scenarios. For population, we use UN estimates, as shown in Figure 11. China‟s population growth is forecast to decelerate in the years leading up to 2030, reaching 1.46bn people. Based on our forecasts, China‟s per-capita GDP will likely increase by about 6-7% y/y until 2019, with growth then to slowing to 4-5% y/y. China‟s percapita GDP currently stands at approximately USD 5,100 and we expect it to reach USD 13,153 in 2030. Figure 11: Our estimates of China’s population and GDP Figure 12: We use these to forecast China’s steel consumption out to 2030 (mt) 20,000 1,500 18,000 1,400 16,000 1,000 900 1,300 Population, mn (RHS) 12,000 700 1,200 14,000 Bull Base 800 600 Bear 500 10,000 8,000 1,100 400 6,000 1,000 300 4,000 GDP bn USD, real, base year 2010 2,000 - 200 900 800 1971 1981 1991 2001 2011 Forecast variation 2021 Sources: IMF, UN, Standard Chartered Research 100 0 2000 2005 2010 2015 2020 2025 2030 Sources: IMF, UN, WSA, Standard Chartered Research
    • 16 September 2012 11
    • China steel – Embracing a new age We derive total steel consumption forecasts from per-capita steel consumption as well as GDP and population forecasts Applying all of these estimates to our per-capita steel consumption scenarios, we arrive at steel consumption forecasts (Figure 12). Our model suggests that in the base-case and bull-case scenarios, China‟s steel consumption will continue to grow in the next 13 years until 2025, although growth will likely begin to decelerate after 2013, roughly when we expect China‟s „super-cycle‟ to begin to slow down. In our base-case scenario, the peak year is 2025, with consumption at 823mt. By 2030, this falls only slightly (1.7%) to 809mt. Total steel consumption increases by 155mt between 2013 and 2025 (+23%). Our bull case also has a peak of 2025, but at a higher consumption level of 874mt, which suggests an aggregate increase of 206mt (31%) between 2013 and 2015. In 2030, our bull case suggests that total consumption will be 856mt, a 2.1% decline from the peak. In our bear case, consumption peaks at 727mt in 2017. Beyond the peak, we see a gradual decline to 608mt by 2030 (-16.4%). A trigger that could set China on this bear-case path would be an earlier-than-expected peak in urbanisation, but we believe the chance of this is minimal. The variation between our bear to bull cases for steel consumption is approximately 248mt in 2030. We use this variation to approximate our base model error in 2030, which we calculate to be ± 15%. The risk to our view would be a more significant deceleration owing to policy change in China that takes per-capita consumption on a different path, as seen in other major industrial countries. Figure 13: China’s GDP composition Real growth contributions, ppt of real growth 16 14 Net exports 12 Investment 10 Government 8 6 4 2 0 Consumption -2 -4 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
    • Sources: CEIC, Standard Chartered Research 16 September 2012 12
    • China steel – Embracing a new age Some other findings Our steel forecasts also reveal two interesting findings. 1. China‟s annual steel consumption growth has already peaked and will slow to less than 1% from 2021 until consumption peaks in 2025. But even with flatter future growth than the past decade, the additional consumption in volume terms remains substantial due to a high base. For example, total steel consumption will increase by 155mt between 2013 and 2025 (+23%). Between 2014 and 2025, our base-case scenario suggests average growth of 1.3% y/y. There will be virtually no increase in steel consumption in the peak year of 2025. As shown in Figure 14, total steel consumption rises by 6.0% y/y in 2012, in line with our long-standing view on China‟s steel consumption this year. In a previous report (Commodity Outlook, 22 November 2011, ‘Steel – China’s 2012 demand forecast’), we adopted a bottom-up method to forecast consumption in 2012 but achieved the same result. We are comfortable that steel growth in 2013 will remain at 6% y/y, even if GDP growth is below our current forecast, as we believe that steel-intensive infrastructure investment is the only efficient way to stabilise economic growth in the short term. 2. Steel consumption is likely to decline on a y/y basis when GDP growth is below 5.0%. The post-peak years could be painful for steel mills, with demand shrinking rapidly. Figure 14: Our base-case forecasts for China’s steel consumption between now and 2030 2009E Total steel consumption, mt Total steel consumption, % y/y Steel consumption per capita, kg GDP, % y/y 2010E 2011E 2012F 2013F 2014F 2015F 2016F 2017F 2018F 2019F 525 587 630 668 708 729 748 765 780 792 802 15.2 390 9.2 2020F Total steel consumption, mt Total steel consumption, % y/y Steel consumption per capita, kg GDP, % y/y 811 1.0 566 6.0 11.7 433 10.4 2021F 816 0.6 568 5.5 7.4 462 9.2 2022F 820 0.5 569 5.5 6.0 487 8.1 2023F 822 0.3 569 5.0 6.0 513 8.7 2024F 823 0.2 568 5.0 2.9 525 7.5 2025F 823 0.0 567 5.0 2.7 536 7.5 2026F 821 -0.2 565 4.5 2.3 545 7.4 2027F 819 -0.3 562 4.5 1.9 553 7.0 2028F 816 -0.4 559 4.0 1.6 559 6.5 2029F 812 -0.4 556 4.0 1.3 563 6.5 2030F 809 -0.4 553 4.0 Sources: WSA, IMF, UN, CEIC, Standard Chartered Research 16 September 2012 13
    • China steel – Embracing a new age Section II – Positioning for an evolving demand landscape • We expect China’s steel consumption to be less dependent on the construction sector • The economy’s structural evolution should lead to more demand for high-end steel products • Steel mills need to start making long-term plans; we believe electric steelmaking is the future Time for change China, as the world‟s largest developing economy, remains heavily reliant on the construction sector to drive its steel demand. This has been the case for over a decade, but the next 10 years might witness structural change in market applications for steel, given the increasing importance of the manufacturing sector that will be driven by domestic consumption. While a small group of steel mills in China have realised that it is time to change, most are not yet prepared (either strategically or technologically) to produce more high-end products. Steel mills have to plan for the structural shift in steel use and new growth momentum In this section, we provide our long-term forecast for steel applications in China up to 2026. While the construction sector remains important, accounting for 49.1% of the country‟s steel consumption in 2026, its market share should decline from a peak of 56.6% in 2013-14 to make way for a growing manufacturing-sector contribution. We believe it is critical for steel mills in China to strategically plan their product mix and future location to accommodate the gradual shift in steel applications in the next 10 years. In our view, they should act as soon as possible because developing new technology takes time. We believe building mini-mills in potential consumption areas using EAFs is an economical way of expanding long-term steel output and is easier than acquiring iron ore mines overseas. We have provided analysis on the economics of operating EAFs and their strengths relative to BOFs (see sub-section “Steel mills need to plan their future carefully”). Over the long term, we think mills will need to develop low-cost and highly efficient operations to maximise profitability given the structural shift in steel applications, and that they will need to tailor their expansion to the increasing contribution to demand from hinterland provinces. Figure 15: China’s market applications for steel Figure 16: Length of railways in major countries % of total consumption, as of 2011 Metres per thousand persons Construction China in 2010 Machinery and equipment Railway Automotive Korea in 2006 Others Home appliance Japan in 2006 Metal fittings making Ship building Germay in 2008 Electricity Petrochemical US in 2007 Container 0 10 20 30 40 50 60 Source: Standard Chartered Research 16 September 2012 0 100 200 300 400 500 600 700 800 Sources: CEIC, Standard Chartered Research 14
    • China steel – Embracing a new age Figure 17: Steel consumption and application in China – Our long-term forecasts 2009E 2010E 2011E 2012F 2013F 2014F 2015F 2016F 2017F 2018F 2019F 2020F 2021F 2022F 2023F 2024F 2025F 2026F Consumption, mt Construction 273 314 345 375 401 413 Machinery and equipment Automotive 84 88 93 98 103 106 109 113 117 121 126 131 136 140 145 149 154 158 48 51 56 59 62 66 70 74 77 81 84 88 91 94 97 100 Railway 43 Metal fittings making Home appliance 37 15 11 47 50 14 13 49 13 15 48 13 15 49 13 17 50 14 18 423 50 14 19 431 51 14 20 436 51 14 22 440 51 14 23 441 51 14 24 440 51 14 25 436 51 15 26 433 51 15 27 426 51 15 28 420 51 15 30 412 51 15 31 403 51 15 32 Ship building 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 Petrochemical 6 6 7 7 7 7 7 8 8 8 8 8 8 8 8 8 8 8 4 4 4 4 4 4 4 4 3 3 3 3 3 3 3 3 3 3 Electricity 6 7 8 9 Others 37 35 39 39 39 40 39 37 36 34 32 30 29 28 26 25 24 22 Total 525 587 630 668 708 729 748 765 780 792 802 811 816 820 822 823 823 821 Consumption, % y/y Construction Machinery and equipment 17.2 15.0 9.9 8.7 6.8 3.0 2.5 2.0 1.2 0.8 0.2 -0.2 -1.0 -0.7 -1.4 -1.5 -1.8 -2.3 5.3 4.8 5.7 5.4 5.2 3.0 3.0 3.5 3.5 3.5 4.0 4.0 4.0 3.0 3.0 3.0 3.0 3.0 Container Automotive Railway Metal fittings making Home appliance Ship building Petrochemical Container Electricity Others Total 49.1 27.0 2.1 6.3 -2.0 -2.0 79.8 16.3 0.0 -6.7 -7.1 10.0 20.0 12.1 0.0 0.0 -10.0 0.0 -33.3 20.0 -14.0 15.0 3.3 0.0 16.7 -6.8 11.8 4.8 10.0 14.3 13.0 7.3 0.0 1.4 0.0 3.1 10 9.0 3.0 2.0 10.0 -2.0 3.1 11 6.0 1.0 2.0 7.0 -2.0 3.1 -9.1 0.0 0.0 12.5 12.5 10.0 0.0 1.0 1.0 12 6.0 1.0 1.0 7.0 -1.0 3.0 -5.0 8.0 -3.0 13 6.0 1.0 1.0 7.0 1.0 3.0 -5.0 8.0 -4.0 14 6.0 1.0 1.0 7.0 1.0 3.0 -5.0 7.0 -4.0 15 5.0 0.0 1.0 5.0 1.0 2.0 0.0 7.0 -5.0 16 5.0 0.0 1.0 5.0 1.5 2.0 0.0 6.0 -5.0 17 5.0 0.0 1.0 5.0 1.0 1.0 0.0 6.0 -5.0 17 4.0 0.0 1.0 5.0 1.0 1.0 0.0 3.0 -5.0 18 4.0 0.0 1.0 4.0 0.5 0.5 0.0 2.0 -5.0 18 4.0 0.0 1.0 4.0 0.5 0.5 0.0 2.0 -5.0 18 3.0 0.0 1.0 4.0 0.0 0.0 0.0 1.0 -5.0 18 3.0 0.0 1.0 4.0 0.0 0.0 0.0 0.0 -5.0 18 3.0 0.0 1.0 4.0 0.0 0.0 0.0 0.0 -5.0 6.0 6.0 3.0 2.5 2.3 1.9 1.5 1.3 1.1 0.6 0.6 0.2 0.1 0.0 -0.2 56.2 56.6 56.6 56.5 56.3 55.9 55.6 55.0 54.2 53.4 52.7 52.0 51.2 50.3 49.1 Contribution to total steel consumption, % Construction 51.6 Machinery and equipment Automotive 15.9 15.3 15.1 14.7 14.6 14.6 14.6 14.8 15.0 15.3 15.7 16.2 16.7 17.1 17.6 18.2 18.7 19.3 7.1 8.1 7.7 7.6 7.9 8.1 8.4 8.6 9.0 9.3 9.6 10.0 10.4 10.7 11.1 11.5 11.8 12.2 6.3 6.3 6.3 6.3 6.3 6.3 6.3 Railway Metal fittings making Home appliance Ship building Petrochemical Container Electricity 8.3 2.7 2.1 1.7 1.2 0.8 1.5 53.2 8.8 2.4 2.4 1.5 1 0.7 1.4 54.5 7.9 2.1 2.1 1.4 1.1 0.8 1.3 7.2 1.9 2.2 1.3 1.0 0.6 1.3 7.0 1.9 2.3 1.2 1.0 0.6 1.4 6.8 1.9 2.4 1.2 1.0 0.5 1.5 6.7 1.8 2.5 1.1 1.0 0.5 1.6 6.7 1.8 2.6 1.1 1.0 0.5 1.7 6.6 1.8 2.8 1.1 1.0 0.4 1.8 6.5 1.8 2.9 1.1 1.0 0.4 1.9 6.4 1.8 3.0 1.1 1.0 0.4 2.0 1.8 3.1 1.1 1.0 0.4 2.1 1.8 3.2 1.1 1.0 0.4 2.1 1.8 3.3 1.1 1.0 0.4 2.1 1.8 3.5 1.1 1.0 0.4 2.2 1.8 3.6 1.1 1.0 0.4 2.2 1.8 3.7 1.1 1.0 0.4 2.2 1.9 3.9 1.1 1.0 0.4 2.2 a Source: St ndard Chartered Research 16 September 2012 15
    • China steel – Embracing a new age Steel applications in China The construction sector is the largest steel consumer in China today Figure 15 shows major steel applications in China. Construction contributes the most, accounting for 54.5% of steel consumption in 2011. This sector consists of real- estate projects (33%), infrastructure projects (13%) and others (8%). Machinery and equipment-making is the second-largest consumer of steel, accounting for 15.1% of total consumption in 2011. The automotives and railway sectors are equally important, contributing 7.7% and 7.9% to total consumption, respectively. Although China has reported substantial growth in these industries in the last 10 years, per-capita use is low compared with developed economies. Taking the railway system as an example, the length of China‟s railways was equivalent to 68 metres per 1,000 persons in 2010, or 6.8cm per capita; note that this is 70% higher than the level in 1949. In comparison, the US had the longest railway length of 750 metres per capita, followed by 510 metres in Germany, 184 metres in Japan and 72 metres in South Korea (Figure 16). China has a long way to go in the coming years. We expect the manufacturing sector to play an increasingly important role in long-term steel consumption Our long-term forecast for steel applications in China Figure 17 shows our long-term forecasts for steel demand among China‟s major consuming sectors between 2012 and 2026. Our forecasts for each sector take into account our economists‟ view that in the next 10 years, China‟s economy will shift from a dependence on investment and exports to domestic consumption. Figure 13 shows that investment will contribute only 3.8ppt to the country‟s GDP growth in 2016, versus 8.2ppt in 2009. As Figure 17 shows, the construction sector is likely to contribute less to overall steel consumption between 2015 and 2026. Its contribution will remain very high until 2014 (at 56.6% of total steel consumption in 2014), but is likely to slow steadily from 2015 onwards it until it begins to decline on a y/y basis in 2020. We expect the construction sector‟s steel consumption to grow 3.0% y/y in 2014, versus 6.8% y/y in 2013. This is mainly because we expect the government‟s infrastructure investment push to wane after 2013 as it opts for a long period of slower growth while seeking new growth drivers. Figure 18: US market applications for steel Figure 19: Japan’s market applications for steel % of total consumption, as of 2010 % of total consumption, as of 2011 Construction Steel dealers and others Automotive Construction Automotive Machinery and equipment Shipbuilding and marine equipment Energy For further processing Other Electrical machinery and equipment Applicances Industrial machinery and equipment Containers Container Home and office appliances National defence and homeland… 0 Others 5 10 15 20 25 30 35 40 45 0 5 10 15 20 25 30
    • Sources: AISI, Standard Chartered Research 16 September 2012 Sources: JISF, Standard Chartered Research 16
    • China steel – Embracing a new age We expect the manufacturing sector (mainly machinery, automotive and home appliances) to see steady long-term growth. In 2026, we expect the construction sector to account for 49.1% of China‟s steel consumption; the manufacturing sector (mainly consisting of machinery, auto and home appliance manufacturers) will likely account for 35.4% (from 24.6% in 2012). Such a shift is in line with our observations of developed economies, where the manufacturing sector usually has a large share. During this process, we expect manufacturers of flat steel products to see improving profitability. Developed economies are reliant on the manufacturing sector We advise steel mills in China to make long-term plans to adapt to the structural shift in steel demand Figures 18 and 19 show market applications for steel in the US and Japan. Both countries are less dependent on construction than China, and more dependent on automotive production. In 2010, the construction sector accounted for 42% of US steel consumption, while automotive and machinery together accounted for 36%. In Japan, construction is even less important. Only 23% of Japan‟s steel demand came from this sector in 2011, but the whole manufacturing sector, including machinery and automotive, accounted for a substantial 50%. Steel mills need to plan their future carefully Due to growing demand from the manufacturing sector (including machinery, automotive and home appliances), and the declining market share of construction in the long term (Figure 21), we expect China to demand more high-value-added steel products, such as alloys and cold rolled sheet, to support output expansion in the manufacturing sector. This will require mills to start research and development well ahead of time. In the very long term, we believe that mills should focus less on producing long products that are mostly used in construction, although we expect this structural shift in demand and output to take place gradually over the next 10 years. Figure 20: High-end products generate higher gross margins for Baosteel and Wuhan Steel Profit margin Baosteel Cold-rolled coil, % Hot-rolled coil, % Wuhan Steel Cold-rolled coil, % Hot-rolled coil, % Wire rod, % 2002 2003 2004 2005 2006 2007 28 33 34 39 30 43 27 38 24 28 22 24 11 NA NA 12 NA NA 25 41 5 22 16 7 6 12 6 28 18 NA 2008 2009 2010 2011 15 16 18 13 22 16 12 11 22 15 16 10 9 NA 2 NA 1 NA 3 NA Sources: Company reports, Standard Chartered Research Figure 21: Evolution of major steel consumers in China % of total steel consumption, 2009-2026 Construction Railway Ship building Electricity Machinery and equipment Metal fittings making Petrochemical Others Automotive Home appliance Container Figure 22: Output of concrete reinforcing bars % of steel output China in 2010 100% 80% Korea in 2010 60% Japan in 2009 40% Germany in 2009 20% 2009E 2013F 2017F 0% 2021F 2025F
    • US in 2010 0 Source: Standard Chartered Research 16 September 2012 5 10 15 20 25 Sources: WSA, Standard Chartered Research 17
    • China steel – Embracing a new age We use two leading steel mills‟ data to show how high-end products benefit producers (Figure 20). Hot-rolled coil generated higher profit margins for Baosteel in the years before 2007, but thus advantage quickly faded from 2008. This is even clearer in Wuhan Steel‟s case. Between 2002 and 2011, its average profit margin from production of cold-rolled coil was 17%, higher than its 13% profit margin from production of hot-rolled coil and its 6% margin from wire rod. Figures 22 and 23 show China‟s production of key steel products for construction use compared with developed economies. China is the world‟s largest producer of construction steel. Figure 24 shows major countries‟ production of railway track. In the past decade, China has aggressively expanded its output not only of long products, but also of flat products (Figure 25). From 1994 to 2010, while rebar output rose approximately 9x, output of hot-rolled flat products surged more than 16x. Interestingly, as of Q1-2012, plate and sheet accounted for 84% of China‟s imports of finished steel products (Figure 26). The reason for this, we believe, is that steelmaking and finishing technology in China are underdeveloped and domestic demand for high-end products has to be met by imports. (For a basic outline of steelmaking and finishing, please see Appendix I: The process of steelmaking and finishing.) Figure 23: Output of wire rod % of steel output Figure 24: Output of railway track % of steel output 18 2.0 16 1.8 14 1.6 12 1.4 10 1.2 1.0 8 0.8 6 0.6 4 0.4 2 0.2 0 US in 2010 Germany in 2009 Japan in 2009 Korea in 2010 China in 2010 0.0 US in 2010 Germany in Japan in 2009 Korea in 2010 China in 2010 2009 Sources: WSA, Standard Chartered Research Figure 25: China’s output of flat and long products Million tonnes, 1990-2010 Sources: WSA, Standard Chartered Research Figure 26: China still imports high-end products % of total steel product imports, Q1-2012 450 Plate and sheet 400 350 Bar and rod 300 Wire rod 250 Tube and pipe 200 150 Hot rolled flat products Billet 100 50 Angle, shape and section 0 1990 1993 1996 1999 2002 2005 2008 Sources: WSA, Standard Chartered Research 0 20 40 60 80 100 Sources: Chinese customs, Standard Chartered Research
    • 16 September 2012 18
    • China steel – Embracing a new age EAFs are the choice of the future EAFs are still under-developed in China compared to the developed economies Figure 27 summarises the three main types of steelmaking furnaces: basic oxygen furnace (BOF), electric arc furnace (EAF) and open hearth furnace (OHF). BOFs and EAFs are the most commonly used furnaces globally, although their contribution to total steelmaking varies by country. OHFs have been phased out due to their heavy dependence on energy and their inability to produce high-end products. Even in China, there has been virtually no OHF production since the early 2000s, although OHFs accounted for 51% of China‟s steel production in 1970. China‟s steel production is particularly reliant on BOFs, which require more iron ore than EAFs. Figure 28 shows steel production by BOFs and EAFs in major countries; China was the world‟s top producer of BOF steel in 2010. The historical trend of the development of BOFs and EAFs in China contrasts with developed economies, as shown in Figures 29 and 30. Between 1970 and 2010, China‟s BOF steel production surged from 25% to 90% of the total , while EAF output declined from 22% to 10%. In developed countries, the trend is the opposite. Between 1970 and 2010, US steel output from BOFs declined from 48% to 38%. This period was accompanied by a surge in EAF output, from 15% to 61%. The advantages of EAFs have benefited developed economies; we believe they will benefit China in the long term Historically, the expansion of EAF output was restricted by the lengthy transformation process from scrap to steel, but since the early 1990s technological developments have significantly reduced the time for EAF steelmaking. As a result, EAF production has grown rapidly in the US, Germany and South Korea. Growth in EAF output is also a result of the structural change in market applications for steel in developed economies. Figure 27: Steelmaking furnaces Raw material Basic oxygen furnace (BOF) Energy source Products Notes Iron ore and scrap (15-25%) Coke Carbon steel, low-alloys NA Electric arc furnace (EAF) Scrap (100%) Electricity High-end carbon steel, low-alloys, alloys Main method for production of high-end products Open hearth furnace (OHF) Scrap, iron ore and flux (limestone and quicklime) Gas and heavy oil General products Very energy-intensive Source: Standard Chartered Research Figure 28: Steel output from BOFs and EAFs Figure 29: Steel output from BOFs, 1970-2010 % of steel output, 2010 % of steel output 100% 100 90% 80% China 90 EAFs 60% 70 50% 60 40% Japan Germany 80 70% 50 30% 40 BOFs 20% Korea US 30 10% 0% China Japan Germany South Korea US Sources: WSA, Standard Chartered Research 20 1970 1975 1980 1985 1990 1995 2000 2005 2010 Sources: WSA, Standard Chartered Research
    • 16 September 2012 19
    • China steel – Embracing a new age Key strengths and weaknesses of EAFs Other advantages in electric steelmaking have driven EAF expansion in developed economies. 1. The use of EAFs allows steel to be made from a 100% scrap metal feedstock. This greatly reduces the energy required to make steel relative to primary steelmaking from ores, also helping to help reduce carbon emissions. 2. EAFs have greater operational flexibility than BOFs. EAFs can be started and stopped quickly, allowing steel mills to adjust production according to demand. In contrast, BOFs are unable to alter their production much and are never stopped for years at a time. 3. EAFs are flexible in terms of feedstock. Although scrap steel is usually the main feedstock, hot metals from BOFs or direct-reduced iron (DRI) can also be used as feed if they are economically viable. 4. EAFs are the main furnaces for mini-mills, which can be located relatively close to steel product markets. Therefore, transport requirements are lower than for integrated mills, which would commonly be located near ports for access to shipping. This means the capital cost of building a mini-mill is significantly lower than an integrated mill. In South Korea, the capex requirement to build a mini- mill is USD 307/t, versus USD 875/t for an integrated mill. In China, we estimate that the cost of building EAF capacity is CNY 1,300-1,400/t, more than 70% lower than the c.CNY 5,000/t required for an integrated converter, including sinter and coking plants. 5. Building a mini-mill using EAFs as the main furnaces usually takes 12-18 months, versus three years for an integrated mill using BOFs. This allows steel mills to respond efficiently to demand. Figure 30: Steel output from EAFs, 1970-2010 % of steel output 70 60 US 50 South Korea 40 Germany 30 Japan 20 China 10 0 Jan-70 Jan-74 Jan-78 Jan-82 Jan-86 Jan-90 Jan-94 Jan-98 Jan-02 Jan-06 Jan-10 Sources: WSA, Standard Chartered Research 16 September 2012 20
    • China steel – Embracing a new age Environmental and power issues need to be addressed, but they should not prevent the development of EAFs in China But there are also challenges, mainly related to the environment. Much of the capital cost of a mini-mill (using EAFs) usually relates to systems intended to reduce adverse environmental effects, including enclosures to reduce high sound levels and dust collectors for furnace off-gas. Meanwhile, mini-mills also have to invest in cooling water systems, equipment to deal with slag production, heavy truck traffic for scrap, materials handling and products, as well tackling the environmental effects of electricity generation. An extremely important issue for EAFs is the power supply system. Due to the very dynamic quality of EAF loads, technical measures are required to maintain the quality of power for other customers. Flicker and harmonic distortion on a power system are also commonly induced by EAF operations. Production costs for EAFs are lower than BOFs EAFs are cheaper to operate and are less polluting and energyintensive than might be thought Figure 31 shows a general picture of steel production costs for EAFs and BOFs. On average, EAF production costs are c.20% lower than BOF costs. This advantage of EAFs has been particularly obvious since early 2010. Many might wonder if EAFs are economically feasible in China, as they appear to require higher electricity consumption during the steelmaking process. However, when also factoring in iron- making and coking process, the total energy consumption of steelmaking by EAFs is only c. 40% that for BOFs, which represents energy savings of 60%. Figure 32 shows raw-material and energy consumption/emissions associated with producing one tonne of crude steel from EAFs and BOFs. EAFs are not reliant on iron ore and require 90% less coking coal than BOFs. Electricity demand from EAFs is generally 60% lower than from BOFs, as the latter have a longer production chain. In terms of pollution, EAFs produce 27% of the CO2 emissions produced by BOFs, while dust generation is only 10% that of BOFs. Figure 31: China steel costs – EAFs versus BOFs (CNY/t) 7,000 Production cost for BOFs 6,000 5,000 4,000 Production cost for EAFs 3,000 2,000 1,000 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Sources: Bloomberg, Standard Chartered Research
    • 16 September 2012 21
    • China steel – Embracing a new age A promising long-term outlook for EAFs Higher scrap requirement, the absence of an emissions tax, and mills’ social responsibility are factors holding back EAF expansion in China for now The fact that EAFs naturally require a lot more scrap steel than BOFs is one of the main reasons why China has not built more EAF capacity, in our view. There are also other reasons. First, the absence of a tax on CO2 emissions makes the cost advantage of using EAFs much less obvious. China is unlikely to impose such a tax in the near term, as c.50% of its blast furnaces are state-owned enterprises. Second, although EAFs are easier to turn on and off, particularly during periods of economic downturn or steel oversupply, steel mills in China operate for other reasons, such as maintaining social stability by providing jobs to locals. We expect domestic scrap supply to increase as the economy matures We believe electric steelmaking should be the future choice for China‟s steel mills given its numerous strengths, particularly its lower cost, flexibility and ability to produce high-end products. In developed countries, recycling already accounts for around half of the steel produced every year. The near-term concern in China surrounds the domestic supply of scrap steel. While steel recycling is in its early stages and is extremely fragmented, we expect it to grow as the economy matures – hence reducing the cost of recycling. But this is a longterm story. Steel mills still have a few years to consider this matter, as scrap availability is unlikely to increase to a level sufficient to support more EAFs in the next five years. Significant raw-material savings can be achieved by using EAFs One important implication here is that increasing use of EAFs will likely reduce China‟s reliance on iron ore and coking coal in the long term. In Figure 33, we show four scenarios for raw-material consumption by China under different EAF production scenarios in 2015. Our base-case assumption is that China‟s EAF production will stay at 10% of total crude steel output in 2015, unchanged from today. But if EAFs contribute 20% to total crude steel output by then, China will require 153mt less iron ore and 52mt less coking coal, and will generate 194mt less CO2. Compared with acquiring iron ore mines overseas, we believe building EAFs to reduce the reliance on imported iron ore is a relatively easy option for steel mills. Figure 32: Raw-material and energy consumption/emissions associated with producing one tonne of crude steel BOFs Iron ore, kg EAFs 1,725 0 Coking coal, kg 645 65 Scrap steel, kg 138 1,050 Electricity, gigajoule 23.3 9.6 CO2, kg 3,000 800 Dust, kg 600 60 Sources: WSA, Mysteel, Standard Chartered Research Figure 33: Raw-material consumption scenario for different EAF production scenarios in 2015 8% 10%* Steel production by EAFs Steel production by BOFs Iron ore Coking coal Scrap steel CO2 emissions 71 Million tonnes 815 1,405 530 187 2,500 89 15% 133 20% 177 Savings, 20% versus 10%, mt Savings, 20% versus 10%, USD bn** 797 753 708 1,375 1,298 1,222 -153 -18.4 520 494 468 -52 -9.4 203 243 2,461 2,364 284 2,267 81 -194 32.4 Priceless *Our base-case assumption; ** Assuming iron ore price at USD 120/t, coking coal price at USD 180/t and scrap steel price at USD 400/t; Source: Standard Chartered Research 16 September 2012 22
    • China steel – Embracing a new age Section III – Inevitable restructuring of the steel industry • Southern and western China will likely see more steelmaking capacity • Large mills will expand, but small mills can still survive • Market forces will dictate the future structure of China’s steel industry The status quo China’s steel industry remains disorderly and imbalanced Along with the impressive growth in domestic demand in the past decades, China‟s steelmaking ability has made significant inroads. In 1996, China surpassed Japan to become the world‟s largest steel producer, with a global market share of 13%. Today, China produces nearly half of global annual steel output (Figure 34). Its steel production is more than double the combined output of the US, Germany, Japan and South Korea. However, China‟s steel industry is more fragmented and less organised than in developed economies. In 2010, steel production by China‟s 20 largest steel mills accounted for only around 50% of the country‟s total steel output. Regional imbalances are also obvious. As we show in Figure 35, northern China is home to the largest numbers of steel mills, while southern China – the country‟s main manufacturing hub – has far fewer. Figure 36 shows China‟s 20 largest steel mills (for a list of the world‟s top steel producers in 2010, please see Appendix II), and Figures 37 and 38 show finished steel production by province. In 2011, northern China accounted for 55% of the nation‟s total output of finished steel products, compared with 46% in 2001. By contrast, southern China contributed less than 10% of overall finished steel production in 2011. In order to restructure the steel industry, the government has encouraged mergers and acquisitions among state-owned mills over the past 10 years. However, progress has been slow, with limited success between 2006 and 2010. Meanwhile, steelmaking capacity is moving in the opposite direction to that desired by Beijing – while outdated steelmaking capacity has been phased out, newer and larger capacity has replaced it. We estimate that as of the end of 2011, China‟s steelmaking capacity hit nearly 800mt, almost double the size in 2006. We expect continued capacity growth in the long term (and we are supportive of such growth), as the country‟s steel demand will require greater supply over the long term than at present. In view of this, we would not be surprised to see total steelmaking capacity reach 900mt by 2020; utilisation should remain very high at around 90%, despite fluctuating profitability. Figure 34: China’s contribution to global steel output (%) Figure 35: Map of mainland China’s top steel mills (mt) 50 45 40 35 30 25 20 15 10 5 0 1967 1972 1977 1982 1987 1992 1997 2002 2007 Sources: WSA, Standard Chartered Research 16 September 2012 Sources: MB, Standard Chartered Research 23
    • China steel – Embracing a new age Regional outlook Southern and western China will build more steelmaking capacity in the future Regional imbalances in China‟s steelmaking should correct in the next 10 years as a result of new steelmaking capacity in southern and western China. Large steel mills will continue to grow, but smaller ones could also find a niche. Industry restructuring will eventually be guided by market forces. We expect southern and western China to build substantially more steelmaking capacity than at present, while most of northern China will have a limited ability to expand further. Steel mills should look to expand their business interests in these areas by utilising government support (i.e., tax rebates that help to reduce capital and operating costs). Figure 39 outlines China‟s plans for the development of its steel industry between 2011 and 2015, according to the country‟s 12 th Five-Year Plan for the steel industry. For western China, the plan is to „moderately‟ develop the regional steel industry given the strength in resources. Xinjiang, in particular, is a popular location for new steelmaking capacity owing to readily available steelmaking raw materials, including iron ore and coal. Southern and south eastern China will be encouraged to build major steelmaking bases given the lack of sufficient steel production in this consumption-intensive region. Three major bases, namely Zhanjiang (Guangdong), Fangchenggang (Guangxi) and Ningde (Fujian), have been given approvals by Beijing. Zhanjiang and Fangchenggang, operated by Baosteel and Wuhan Iron and Steel, have a designed capacity of nearly 10mt of sheet per year each (see Figure 40 for details of both projects). These two projects were approved by Beijing in May 2012. However, we are concerned that the two neighbouring bases have a rather similar product mix, since their sheets will be mainly used in automobiles and home appliances. delay It remains unclear whether Baosteel and Wuhan will the construction of the bases because of this, but in the long term, we think it makes sense to build integrated mills in places with easy access to ports to reduce the cost of delivering iron ore inland. In Ningde in Fujian province (south eastern China), a 12mt high-end-products base will be built, to be jointly operated by Anshan Steel and Figure 36: Top 20 steel mills in mainland China mt, as of 2010 Beitai Panzhihua Hebei Jinxi Jiuquan Jianlong Steel Jiangxi Xinyu Taiyuan Rizhao Steel Anyang Baotou Valin Group Maanshan Benxi Steel Anshan Steel Shandong Shougang Shagang group Wuhan Steel Baosteel Hebei Steel 0 10 20 30 40 50 60
    • Sources: MB, Standard Chartered Research 16 September 2012 24
    • China steel – Embracing a new age Fujian Sangang. Note that while mills are allowed to build more capacity, they must agree to dismantle part of their old capacity at the same time. We believe most of northern China will be unable to expand output capacity significantly, as the restructuring of current capacity will be the main theme going forward. Heilongjiang is an exception. Under Beijing‟s five-year plan, Heilongjiang is the only northern province being encouraged to further develop its steel industry, as it is rich in coking coal and geologically close to iron ore-rich Russia. The provincial government has set targets to double its crude steel output to 10-12mt by 2015. Output of finished steel products will be expanded to 9.6-11.5mt, from 6.0mt in 2011. We expect utilisation of future steel capacity in Heilongjiang to be as high as 90%, given its strength in securing low-priced raw materials. Figure 37: Map of finished steel output in mainland China 2001 and 2011, % of total output Heilongjiang 0.5% 0.7% Jilin 1.2% 1.2% Xinjiang 0.8% 1.1% Liaoning Inner Mongolia 0.0% 0.1% Qinghai 0.2% 0.2% Shanxi 4.6% 0.3% 12.2% 21.9% Shandong 5.3% 8.0% Shaanxi Henan 0.4% 1.2% Jiangsu 3.0% 3.8% Anhui Hubei Sichuan 3.5% 3.1% 5.8% 4.1% 4.0% 2.5% Jiangxi 2.5% Guizhou 0.9% 11.1% 11.4% Shanghai 10.4% 2.8% Zhejiang Hunan 1.2% 1.5% Beijing Hebei 3.1% 3.8% Gansu 1.4% 0.9% 10.5% 6.5% 2.4% 1.6% Ningxia 2.4% 2.2% 2.6% 3.6% Fujian 2.1% Guangxi 0.9% 2.0% Guangdong 3.6% 3.6% Blue figure: production in 2001 Green figure: production in 2011 Hainan 0.1% 0.0% Sources: Mysteel, Standard Chartered Research
    • 16 September 2012 25
    • China steel – Embracing a new age Steel mills – Getting even larger In the next 10 years, we expect China‟s large steel mills to grow even larger by expanding their output capacity with government support, as well as via mergers and acquisitions. Mergers and acquisitions have proved difficult in the last decade, as the restructuring of state-owned mills almost always faces headwinds from different interest groups, particularly during highly profitable periods. Free-market forces should help to decide the direction of restructuring However, given declining profit margins and increasing competition in the long term, we believe mills in financial difficulty will start to seriously consider deals with their competitors. While in China, as elsewhere, the government has been deeply involved in the steel business at the developing stages, we believe that the restructuring of the industry will ultimately be decided by market forces. We believe that as long as small mills are profitable, the government should not force them to leave the market. With the economy maturing and more scrap economically available, we believe the future trend is for China to build more lower-cost mini-mills in its hinterlands (as discussed in Section II). Those that rely heavily on high-cost iron ore and coking coal without economies of scale will find it difficult to survive. Figure 38: Output of finished steel products by province Provinces 2001 (kt) 2011 (kt) % of total output in 2001 % of total output in 2011 Hebei 19,144 192,268 12.2 21.9 Jiangsu 17,541 99,940 11.1 11.4 8,344 70,337 5.3 8.0 16,552 57,399 10.5 6.5 Tianjin 4,450 51,638 2.8 5.9 Hubei 9,117 35,697 5.8 4.1 Shanxi 4,940 33,692 3.1 3.8 Henan 4,754 33,512 3.0 3.8 Guangdong 5,671 31,766 3.6 3.6 Zhejiang 3,076 31,353 2.0 3.6 Anhui 5,486 27,430 3.5 3.1 16,411 24,828 10.4 2.8 Jiangxi 3,829 22,474 2.4 2.6 Sichuan 6,290 22,333 4.0 2.5 Hunan 3,890 19,434 2.5 2.2 Guangxi 1,404 17,593 0.9 2.0 Fujian 3,335 15,603 2.1 1.8 Inner Mongolia 3,817 14,173 2.4 1.6 Yunnan 1,810 13,514 1.2 1.5 Jilin 1,938 10,690 1.2 1.2 Shaanxi 642 10,354 0.4 1.2 Xinjiang 1,278 9,802 0.8 1.1 Chongqing 1,614 9,482 1.0 1.1 Gansu 2,256 8,128 1.4 0.9 762 5,966 0.5 0.7 Guizhou 1,386 4,624 0.9 0.5 Beijing 7,173 2,870 4.6 0.3 363 1,414 0.2 0.2 Ningxia 4 765 0.0 0.1 Hainan 79 232 0.1 0.0 157,354 879,311 100.0 100.0 Shandong Liaoning Shanghai Heilongjiang Qinghai Total Sources: Mysteel, Standard Chartered Research 16 September 2012 26
    • China steel – Embracing a new age Figure 39: The Chinese government’s development plans for the steel industry between 2011 and 2015 Regions Government plan Bohai Bay and Yangtze River Delta No plan to build any new steelmaking capacity. Hebei, Shandong, Jiangsu, Liaoning and Shanxi To remove outdated steelmaking capacity via mergers and acquisitions. Hunan, Hubei, Henan, Anhui and Jiangxi To push forward structural change and upgrades of the regional steel industry. Western China To „moderately‟ develop the regional steel industry on the basis of resources strength. South and south-eastern coastal area To continue the construction of steelmaking bases in the region, particularly in Zhanjiang (Guangdong), Fangchenggang (Guangxi) and Ningde (Fujian). Yunnan and Heilongjiang To develop the steel industry by utilising cross-border mining resources and markets. Sources: The 12th Five-year Plan for Steel Industry, Standard Chartered Research Figure 40: Summary of two large-scale steel projects Project Fangchenggang Zhanjiang Location Guangxi Guangdong Owner Wuhan Steel Baosteel 64.0 69.7 Capex, CNY bn Capacity, mt per year Iron 8.5 9.2 Crude steel 9.2 10.0 Steel product (sheet) 8.6 9.4 Crude steel capacity to be eliminated in the province 10.7 16.1 Net capacity addition in the province -1.5 -6.1 Sources: Company reports, Standard Chartered Research 16 September 2012 27
    • China steel – Embracing a new age Section IV – Steel growth provides long-term support to iron ore • We expect China’s iron ore imports to peak in 2025, providing long-term support for iron ore prices • China will be more reliant on imports due to falling domestic ore grades • Iron ore prices will not start to trend down until 2014 China’s dependence on iron ore imports will grow In this section, we provide our long-term forecasts for China‟s iron ore demand, production and imports up to 2026 (Figure 41). We expect demand to peak at 775mt (measured by Fe content) in 2020, but imports to peak at 989mt (rock weight) in 2025. Imports are a critical influence on future iron ore price trends. We expect China‟s dependence on imported iron ore to increase further in the long term due to declining domestic ore grades, although growing EAF output should help reduce such dependence. Steel output Long-term, China should be selfsufficient in terms of steel supply Our view of China‟s long-term steel output is the starting point for our iron ore forecasts. Figure 42 shows our forecasts for China‟s crude steel output. These assume that the country‟s steel output growth will realign with demand in the long term. Between 2012 and 2020, China‟s crude steel output growth should continue, followed by a period of flat performance between 2021 and 2023. From 2024 onwards, we expect steel output to decline as consumption wanes. We observe the same in the developed economies we have analysed. Our view of steel output by BOFs is particularly relevant to iron ore demand, as iron ore accounts for 75-85% (in general) of steelmaking raw materials required by a BOF. In China, this rate can be as high as 95%. While we expect steel output by BOFs to grow between 2012 and 2020 before declining between 2021 and 2026, we have also allowed for increasing use of scrap by BOFs between 2018 and 2022. Meanwhile, we expect increased EAF output to cap the upside for iron ore demand in the long term, although the effect should be moderate. Figure 41: China’s iron ore balance and our price forecasts Forecasts in BLUE (RED) indicate upward (downward) revision Million tonnes Iron ore demand, 62% grade Fe demand Fe supply, domestic and imports Domestic iron ore output, total weight 1,291 Domestic iron ore output, Fe content Iron ore imports Iron ore imports, Fe content Iron ore price*, USD/t 2009A 2010A 2011A 2012F 2013F 2014F 2015F 2016F 2017F 2018F 2019F 2020F 2021F 2022F 2023F 2024F 2025F 2026F 850 527 559 875 201 628 358 80 924 573 1,005 1,052 1,116 1,160 1,183 1,207 1,225 1,235 1,244 1,249 1,244 1,239 1,239 1,227 1,202 1,154 623 653 692 719 734 748 760 766 771 775 771 768 768 761 745 716 588 636 677 738 1,066 1,315 1,447 1,663 245 263 289 333 619 343 147 689 373 170 717 739 757 1,913 363 706 767 765 2,009 382 691 1,968 374 758 1,929 347 705 744 388 406 394 385 391 127 135 125 115 113 (143)** (182)** (180)** (133)** 410 114 770 1,929 347 766 423 120 774 1,910 344 789 430 121 770 1,872 318 829 452 128 770 771 1,778 302 858 755 1,689 287 888 467 484 122 - 756 1,605 257 923 499 - 740 1,492 239 960 517 - 713 1,388 208 989 532 - 194 964 519 124 *62% Fe content, cost and freight at China’s Tianjin port; ** Previous forecasts
    • Sour 16 September 2012 Chartered Research 28
    • China steel – Embracing a new age All about iron ore Demand We expect iron ore demand to peak in 2020 We have adopted three key assumptions in forecasting China‟s long-term iron ore demand: (1) we assume that China‟s long-term steel demand will be met primarily by domestic production; (2) steel output contributed by BOFs should gradually decline over time, along with the increasing availability of scrap for EAFs as recycling activities grow with economic development; (3) 1.6t of iron ore is required for each tonne of steel output, assuming an iron ore grade of 62%. Our forecasts for China‟s iron ore demand (Figure 41) are based on the iron content required for steel production by BOFs and EAFs. While BOFs are heavily reliant on iron ore for steelmaking, EAFs also use DRI made from iron ore as feedstock, although at a low proportion of c.20% in China. We have considered iron ore demand (in the form of DRI) by EAFs in our forecasts. Multiplying by 1.6, we obtain iron ore demand from BOFs and EAFs at a grade of 62%. After adjusting for grading, we forecast that China‟s Fe demand will peak at 775mt in 2020, before declining from 2021. Between 2018 and 2026, the increasing availability of scrap will crowd out the use of iron ore, but only moderately, in our view. China’s domestic production Domestic iron ore production has limited potential to rise in the next few years, in our view; falling ore grades are another concern Domestic iron ore production increased to meet extraordinary growth in demand throughout the 2000s, but mines were still able to produce more over the last decade. In 2011, China‟s iron ore output hit a record-high level of 1,315mt (weight of rock), more than five times higher than the volume in 2000. The biggest challenge for iron ore producers is the declining iron content in the rock. The average iron content of China-origin ores is c.20% today, versus c.30% in 2004. This is also significantly lower than c.60% for Australian- and Brazilian-origin ores. Figure 43 shows our forecasts for falling grades in China and elsewhere. Long-term, we believe falling ore grades in China will make the country more reliant on imported ores. Although ore grades in Australia have also been declining in recent years, a lower contribution by India (which has exported huge volumes of lower-grade ores to China in the last five years) will allow the average grade of ores supplied to China to remain at a relatively stable level over the long term. Meanwhile, we expect iron orerich countries, mainly Brazil and Australia, to take market share from India. Figure 42: Our forecasts for China’s steel output 2009A 2010A 2011A 2012F 2013F 2014F 2015F 2016F 2017F 2018F 2019F 2020F 2021F 2022F 2023F 2024F 2025F 2026F mt Crude steel output 574 627 683 715 758 788 804 820 832 841 847 852 852 852 852 848 746 831 732 798 Steel output by BOFs 521 565 615 644 682 709 724 738 749 755 760 763 759 754 754 702 Steel output by EAFs 52 61 68 72 76 79 80 82 83 86 87 90 94 98 98 102 100 96 % y/y Steel output by BOFs Crude steel output 14.6 14.6 8.5 9.3 8.7 9.0 4.7 4.7 6.0 6.0 4.0 4.0 2.0 2.0 2.0 2.0 1.5 1.5 0.8 1.0 0.7 0.8 0.4 0.6 -0.6 0.0 -0.6 0.0 0.0 0.0 -1.1 -0.5 -2.0 -2.0 -4.0 -4.0 Source: Standard Chartered Research
    • 16 September 2012 29
    • China steel – Embracing a new age Based on our understanding of China‟s iron ore mining industry, we do not expect significant growth in iron ore output in the coming years, although falling ore grades always imply that higher output is required. We forecast average output growth of 11% y/y between 2012 and 2015, but expect domestic iron ore production to start to trend down from 2016. During this period, ore grades should continue to fall from 20% at present to around 15% in 2026. Domestic production of iron ore is likely to peak at 2,009mt (weight of rock) in 2015. In terms of Fe content, total Fe supply from domestic iron ore output will peak at 382mt in 2015. This is critical to our forecasts of China‟s iron ore imports. Imports We expect China’s iron ore imports to peak in 2025 When forecasting China‟s long-term iron ore imports, we assume that the gap between domestic supply and total Fe demand will be filled by imports. This means total Fe supply, including domestic supply and imports, should always be in line with total Fe demand. Historical trends suggest the same thing. As we show in Figure 41, total Fe supply did not vary much from total Fe demand in 2009, 2010 and 2011, although there were small differences. We assume that they will continue to go hand in hand in the long term. Considering the weighted average grade for imported iron ore shown in Figure 43, the peak year for China‟s iron ore imports is 2025. The peak level is 989mt (Figure 41). After this, moderate declines will be seen in 2026. As a result of this methodology, we have lowered our forecasts for China‟s iron ore imports from 2013-15. Our 2013 forecast is now 739mt, versus 760mt previously; for 2014 we forecast 706mt, from 799mt previously; and for 2015 we forecast 691mt, from 838mt previously. These downward revisions will help to ease tightness in the seaborne iron ore market (although larger supply of iron ore will also be a key contributor). Our seaborne balance sheet (Figure 44) shows that the market deficit will start to narrow sharply from 2014, and will turn to a surplus in 2015. Our long-term forecasts for iron ore prices remain unchanged, although we have revised down our 2012 prices to take into account weakness in the global economy and its negative impact on near-term prices (see On the Ground, 24 August 2012, ‘Iron ore – Cast-iron proof of slow demand’). We have also lowered our price forecasts for 2013 to USD 135/t from USD 182/t, for 2014 to USD 125/t from USD 180/t, and for 2015 to USD 115/t from USD 133/t, to reflect downward revisions to China‟s imports.
    • 16 September 2012 30
    • China steel – Embracing a new age Figure 43: Iron ore grades Iron content, % 2009A 2010A 2011A 2012F 2013F 2014F 2015F 2016F 2017F 2018F 2019F 2020F 2021F 2022F 2023F 2024F 2025F 2026F Weighted average iron ore grade, total supply to China 37 35 32 32 32 32 32 33 33 34 34 34 35 36 37 38 39 40 Average iron ore grade, China 23 23 20 20 20 19 19 19 18 18 18 17 17 17 16 16 15 15 Weighted average iron ore grade, imports 57 55 54 54 55 56 56 55 55 55 55 55 54 54 54 54 54 54 Average iron ore grade, Australia 60 59 59 59 59 58 58 58 58 58 57 57 57 57 56 56 56 56 Average iron ore grade, Brazil 62 62 62 62 62 62 62 62 61 61 61 61 61 61 61 61 61 61 Average iron ore grade, India 58 55 55 55 55 55 55 54 54 54 54 54 53 53 53 53 52 52 Average iron ore grade, South Africa 64 64 64 64 64 64 64 64 64 64 64 64 64 64 64 64 64 64 Average iron ore grade, ROW 34 34 33 33 33 33 32 32 32 32 31 31 31 31 31 30 30 30 Source: Standard Chartered Research Figure 44: Global iron ore seaborne balance mt, unless otherwise noted 2011E 2012F 2013F 2014F 2015F Australia 438 480 510 547 617 Brazil 329 339 356 385 416 India 78 50 35 25 25 South Africa 56 61 67 71 72 124 126 134 154 204 1,025 1,056 1,102 1,182 1,334 Global, % y/y 7.3 3.0 4.4 7.3 12.9 Global, & y/y growth in volume 70 31 46 80 152 China 689 717 739 706 691 Europe 153 122 128 134 141 Japan 129 131 133 136 139 South Korea 65 67 69 71 73 Taiwan 21 21 21 21 21 126 128 130 137 144 1,183 1,186 1,220 1,205 1,209 Global, % y/y 9.9 0.3 2.9 -1.2 0.3 Global, % y/y growth in volume 107 3 34 -15 4 Balance -158 -130 -118 -23 125 Balance (previous) -158 -145 -116 20 185 Seaborne supply (exports) ROW Global Seaborne demand (imports) ROW Global Source: Standard Chartered Research 16 September 2012 31
    • China steel – Embracing a new age Appendix I: The process of steelmaking and finishing Steelmaking Steel finishing Source: AISI 16 September 2012 32
    • China steel – Embracing a new age Appendix II: World’s top steel producers in 2010 Rank Company 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 ArcelorMittal Hebei Steel Baosteel Wuhan Steel Nippon Steel Posco JFE Steel Shagang Group Shougang Tata Steel Shandong US Steel Anshan Steel Gerdau Benxi Steel ThyssenKrupp Nucor Evraz Maanshan Valin Group Severstal Riva Group Metinvest SAIL Sumitomo Metal Hyundai Steel China Steel NLMK MMK Imidro Baotou Anyang Rizhao Steel Taiyuan Jiangxi Xinyu Techint Jianlong Steel Jiuquan Hebei Jinxi ISD Voestalpine Kobe Steel Panzhihua Beitai Tangshan Guofeng Usiminas Erdemir Pingxiang Bluescope Steel Nanjing Salzgitter JSW Steel Changzhou Zenith CITIC Pacific Metalloinvest Mechel Hebei Zongheng Tianjin Tiangang Country Production, million tonnes Rank Company Country Production, million tonnes Luxembourg China China China Japan South Korea Japan China China India China USA China Brazil China Germany USA Russia China China Russia Italy Ukraine India Japan South Korea Taiwan Russia Russia Iran China China China China China Luxembourg China China China Ukraine Austria Japan China China China Brazil Turkey China Australia China Germany India China China Russia Russia China China 90.50 52.90 44.50 36.55 36.14 33.72 32.66 30.12 25.84 23.50 23.15 22.26 21.00 17.80 16.80 16.70 16.56 16.29 15.40 15.11 14.70 14.10 13.83 13.58 13.10 12.91 11.93 11.50 11.40 11.34 10.12 10.02 9.81 9.60 8.87 8.84 8.82 8.57 8.25 7.77 7.70 7.61 7.50 7.49 7.49 7.29 7.10 7.05 6.78 6.77 6.75 6.38 6.31 6.21 6.10 6.07 6.06 6.00 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 Essar Steel SSAB Fujian Sangang Tianjin Tiantie Tianjin Metallurgical Hebei Jingye AK Steel Tonghua Hadeed CSN Chongqing Ezz Steel Steel Dynamics Habas Shaanxi Longmen Nisshin Steel Ahmsa Icdas Xinxing Ductile Hangzhou Zaporizhstal Lingyuan Rockcheck Steel Lion Group Vizag Steel Hebei Qianjin Zhejiang Quzhou Yuanli Xilin Steel Qingdao Shanxi Haixin Dongkuk Steel Commercial Metals Co Xingtai Lengshuijiang Sichuan Chuanwei Henan Jiyuan TMK Delong Steel Fangda Special Steel BMZ Taishan Trinecke Zelezarne Tangshan Ganglu Tianjin Steel Pipe Dazhou Jiangyin Huaxi Ispat Industries Shandong Weifang Rautaruuki Diler Vallourec Colakoglu Onesteel Shandong Shiheng AFV Beltrame Acerinox Shanxi Zhongyang Nanyang Hanye India Sweden China China China China USA China Saudi Arabia Brazil China Egypt USA Turkey China Japan Mexico Turkey China China Ukraine China China Malaysia India China China China China China South Korea US China China China China Russia Singapore China Belarus China Czech Rep China China China China India China Finland Turkey France Turkey Australia China Italy Spain China China 5.95 5.80 5.60 5.50 5.50 5.23 5.14 5.10 5.02 4.90 4.56 4.46 4.46 4.44 4.06 3.83 3.69 3.61 3.57 3.49 3.45 3.44 3.34 3.33 3.24 3.05 3.04 3.02 3.00 2.96 2.91 2.85 2.73 2.61 2.61 2.60 2.60 2.59 2.57 2.53 2.51 2.50 2.48 2.40 2.35 2.33 2.33 2.31 2.29 2.29 2.20 2.14 2.12 2.11 2.09 2.06 2.05 2.00 Source: MB 16 September 2012 33
    • China steel – Embracing a new age References Learning by doing, export subsidies, and industry growth: Japanese steel in the 1950s and 1960s, by Hiroshi Ohashi, Department of Economics, University of Tokyo The Economic History of Steelmaking 1867-1939: A Study in Competition, by Duncan Burn, Cambridge University Press, 1961 The Steel Industry in Japan: A Comparison With Britain, by Harukiyu Hasegawa, Routledge, 1996 The Global Restructuring of the Steel Industry: Innovations, Institutions and Industrial Change, by Anthony P.D‟ Costa, Routledge, 1999 The Steel Industry 1939-1959: A Study in Competition and Planning, by Duncan Burn, Cambridge University Press, 1961 Steel Town to Space World? Industrial and Regional Restructuring Strategies in Japanese Heavy Industry, by Philip Shapira, West Virginia University, 1989 Statistics on World Population, GDP and Per Capita GDP, 1-2008 AD, by Angus Maddison, University of Groningen The Steel Industry of Japan 2011, Japan Iron and Steel Federation (JISF) American Iron and Steel Institute (AISI) Steel Statistical Yearbooks, 1978-2011, World Steel Association (WSA) World Population Prospects, the 2010 Revision, United Nations (UN) World Urbanization Prospects, the 2001 Revision, United Nations (UN) Urban Population, Development and the Environment 2011, United Nations (UN) Steel Industry Development Report 2011 (钢铁产业发展报告) The analysis of China’s Industries: Steel (中国钢铁行业分析:钢铁卷), edited by Yuan Ju and Lu Chen, China Financial & Economic Publishing House th The 12 Five-year Plan for Steel Industry, by the Central People‟s Government of the People‟s Republic of China, 2011 The Steel Industry Development policy, by the State Council of China, 2005 16 September 2012 34
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    • Disclosures Appendix Analyst Certification Disclosure: The research analyst or analysts responsible for the content of this research report certify that: (1) the views expressed and attributed to the research analyst or analysts in the research report accurately reflect their personal opinion(s) about the subject securities and issuers and/or other subject matter as appropriate; and, (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views contained in this research report. On a general basis, the efficacy of recommendations is a factor in the performance appraisals of analysts. Global Disclaimer: Standard Chartered Bank and or its affiliates ("SCB”) makes no representation or warranty of any kind, express, implied or statutory regarding this document or any information contained or referred to on the document. The information in this document is provided for information purposes only. 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    • Document approved by Data available as of Document is released at HanPin Hsi Global Head of Commodities Research 22:30 GMT 16 September 2012 22:30 GMT 16 September 2012