China steel ‘peak’ could be a threat to iron ore exporters
In the past financial year, China bought $42 billion worth of Australian iron ore products.
Leading Chinese economists believe the country’s steel production may have peaked — leaving some of Australia’s biggest companies, which are still ramping up output, to battle over their share of the market.
This is a crucial issue for Australia since in the last financial year, China bought $42 billion worth of iron ore products — just over half Australia’s total exports to China, and four times the combined amount bought by the two next biggest customers, Japan and South Korea.
Australia’s ore sales to China thus comprise by far the country’s biggest single global export item.
Liu Haimin and Song Ligang, writing in the latest annual China Update, published this week by the Australian National University, say China drove up steel production by six times from 2000 to 2015, to 804 million tonnes, almost half global output.
They say: “The scale of that expansion is unprecedented in the history of industrialisation in Europe, North America and East Asia.”
Last year it exported 100 million tonnes, 50 per cent more than the US’s entire output — though triggering 37 anti-dumping cases.
The economists conclude from surveying expert analysis that “at best, there will be limited if any room for further growth in steel consumption in China” — although conceding that this may stay on a “high platform” for a long time, “depending on the industrial path that China’s economy takes in the years ahead”.
They say that the selling costs for almost half of the enterprises in China’s steel industry exceeded their selling prices in 2015. They lost money.
And as well as the costs of manufacturing, there are costs for pending sales, including general administration and financial expenses. Accounting for those additional costs would drive the loss ratio even higher for some firms.
The profile of the industry in China is also changing rapidly.
Up to last year, Dr Liu and Dr Song say, there were 27 large state-owned steel enterprises — including group companies that owned many steel mills. Their collective steel output was 353 million tonnes, 44 per cent of China’s steel output. The remaining output is attributed to the more than 400 private steel mills.
“Although losses are happening across the board,” they say, “data for the past few years indicate that losses are arising disproportionately within large enterprises, especially large SOEs.” Among the top 10 enterprises with losses in 2015, nine were SOEs.
The average steel output per worker for private steel enterprises is 514 tonnes per year. For SOEs, it is 270 tonnes.
The average wage for an SOE steel mill worker, including social insurance, is about $1000 a month, which is 1.34 times that for a private enterprise employee. Each tonne of SOE-made steel incurs a human cost 2.6 times greater than for a private enterprise.
And the total management cost per tonne of finished steel in SOEs is nearly double that of most mills.
The government is asking the industry to shed half a million jobs, as part of a rationalisation exercise for the industry.
But, Dr Liu and Dr Song say, the state and private sectors are so massively different that “in seeking mergers and industry reorganisation, it has been difficult to align these worlds … or to realise the so-called mixed ownership model sought by the government”.
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