global steel & raw materials industries and the new china effect

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Global Steel & Raw Materials Industriesand the New China Effect

Market Outlook to 2020

A long-term strategic forecast study available in two interdependent volumes, including:TWO STUDY UPDATES THROUGHOUT THE YEARINTERACTIVE STEEL AND RAW MATERIALS DEMAND AND OUTPUT FORECASTING MODEL

“I would positively recommend Metal Bulletin Research as a unique provider of steel & rawmaterials market analysis and forecasts.”Michael Amez, Manager, A.T. Kearney, USA

Global steel prices are under pressure andthere are clear signs that China has broughttoo much steel capacity on-stream withoutphasing out enough of its obsolete steel mills. The problems of global steel oversupply mayremain hidden while China continues toinvest in steel-intensive infrastructure andconstruction projects, but a fundamentalrestructuring of the Chinese steel industrylooks inevitable, and increasingly imminent.

While steel mills in most countries, like theUS and Europe, were idling blast furnaces inearly 2009, Chinese mills were increasing theiroutput by an average of about 3%. Thisreport examines the impact across all the keyglobal regions over the next 5 to 10 years andthe most likely scenarios we can all expect forthe global steel industry.

What is the outlook for Chinanow and the rest of the globalsteel industry?

Will fiscal stimulus packagessucceed in rescuing the worldfrom continuing recession?

What impact on China andthe rest of world is the globaleconomic crisis having by sector?

Will China’s changing steelpolicy reverse the overcapacityand avoid a world steel crisis?

What is the outlook for globalsteel & raw materials prices?


Global Steel & Raw Materials Industriesand the New China Effect Market Outlook to 2020

The global steel industry is facing the threat of competitively priced Chinesesteel, such that China’s importance for international steel markets has never beengreater. Understanding what consequences this will have for the internationalsteel industry will be vital for all market participants.

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Global Steel & Raw Materials Industries and the New China Effect is the first report of its kind toprovide independent and on-the-ground research amid the current economic crisis. The report offersunique insights, a long-term outlook and strategic recommendations for those looking to invest, oralready operating, in the steel and raw materials industries.

This two-volume study comprises extensive on-the-ground analysis of the dynamics and structures of the global steel industry, including theupstream raw materials, plant construction, and downstream end-user sectors. It assesses how this will impact the industry in terms of strategicpositioning, production, trade, consumption and pricing patterns.

Unique strategic insights into the innermechanics of the Chinese steel and rawmaterials industry, from mining up to finalend-users, now and out to 2020.

Key questions addressed in volume 1 include:

• Is there an over-arching and executable planto China’s steel development?

• What are the new strategies for the emergingChinese super-groups Baosteel/GuangdongGroup, Hebei, Anben, Wuhan andShandong?

• What are the expansion plans of public andprivate sector companies and when, if at all,will they be realised?

• What is the future for China’s many small-scale iron and steelmakers?

• Has over-investment now backfired onChina’s growth and the growth of its steelindustry?

• Have the limits to growth in China’sdomestic capital formation created thepotential for a catastrophic collapse ininvestment, growth and steel consumption?

• What is the impact and role of China nowon the steel and raw materials markets?

• Will Chinese steel over-capacity flood theworld with low cost exports?

• Will Chinese exports exacerbate weakdemand elsewhere and precipitate a longperiod of losses for western steelmakers, withclosures and a new wave of take-overs?

• Will Chinese steel companies begin anacquisitions trail overseas as their homeindustry completes its restructuring?

• Will the collapse of plant building in Chinaafter 10 years of breakneck growth leadChinese plant manufacturers, backed by theChinese sovereign wealth funds, to attackthe world market for plant manufacture andcontracting?

• Will the expanding Chinese ore miningsector displace imports, or will the majorscut prices enough to recapture Chinese imports?

• How will China’s massive investments inAustralia, Africa and Latin America affect its trade, and the world market forsteelmaking raw materials? How will it affect Australia’s mining industry, Africa’sgrowth and stability, and Latin America’sresurgent economies?

• Will there ever be real opportunities forwestern investment in China’s steel and rawmaterials industries?

Volume 1: China’s Steel & Raw Materials Industry

Source: Metal Bulletin Research Source: Metal Bulletin Research

China’s steel consumption by end-use sector China’s net exports – flat products

l Construction 53%l Machinery 20%l Automotive 6%l Shipbuilding 4%l Power sector 4%

l Railways 1%l Containers 1%l Pipelines 1%l Domestic Appliances 2%l Other 8%

20

15

10

5

0

-5

-10

-15

-20

Mt

2000 2001 2002 2003 2004 2005 2006 2007 2008

Slabs

Plate

HRC&S

CRC&S

Coatedproducts

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The events of 2008 and 2009 will transformthe world’s steel industry, and the policies andactions of the Chinese government and itssteel companies will have a significant effecton this transformation.

Utilising analysis from volume 1, MBR appliesits long-term forecasting model to analysealternative scenarios for world steel and rawmaterials consumption, trade, and production,and their impact on steel investment andclosures in markets outside China.

Volume 2 analyses two differentscenarios for capacity, consumption,production and trade, in the context oftwo different scenarios for the world’srecovery from recession.

Key questions addressed in volume 2 include:

• What has actually happened to demand andproduction during 2008 and early 2009?

• What is the impact of changes in the globalend-user industries such as automotive,construction and mechanical engineering?

• What will be the global balance of steelcapacity and demand, given China’s likelypolicies on capacity and exporting?

• What will be the balance in global iron ore?What is the implication for the big oremining projects currently being developedby the majors and especially those beingdeveloped by the junior miners?

• Where will steel closures take place?

• What does the future hold for the greenfieldslab export projects in Latin America and SEAsia, and other steel investments?

• What is the implication for the GHGemissions policy in the steel industry?

• What will be the future profile of steel, scrapand ore prices?

Volume 2: Global Steel & Raw Materials and the Impact of China

An extensive appendix describes theprojections resulting from each scenario for allregions of the world.

• Regions covered are::: China:: Industrial Asia (Japan, S Korea, Taiwan):: ASEAN:: South Asia:: Middle East & North Africa:: Africa:: Europe:: CIS:: NAFTA (North America):: Central & South America:: Oceania

• User sectors covered for China include::: Construction:: Automotive:: Shipbuilding:: Railways:: Domestic appliances:: Packaging:: Mechanical engineering

• Product groups covered in productionand trade forecasts by region are:

:: Semis:: Flat products and welded tubes:: Long products and seamless tubes

• Raw materials and inputs covered are::: Iron ore:: Coking coal and coke:: Scrap:: Ferro-alloys:: Refractories and electrodes:: Power:: Transport and logistics

Source: Metal Bulletin Research

Fast Recovery Slow Adjustment

Optimistic world growth; 8% growth inChina with high investment

Prolonged world recession; slow growthand low investment in China

No constraintsChina’s steel expansion plans fulfilled;export incentives

Most likely case if world recession is short;China’s recovery plan successful.Likelihood XX%2012: Cap XXX

Net Export XXCrude Steel XX

‘Stress test’: High exports and excess capacity: bigimpact on trading partners.Likelihood XX%2012: Cap XXX


China’s plan case: Allows rapid closures of old,dirty plant; high capacity utilisation.Likelihood XX%2012: Cap XXX

Net Export -XCrude steel XXX

Best response if world recession prolongedand/or China’s recovery plan is less successful.Likelihood XX%2012: Cap XXX


Capacity constraintsExpansion plans postponed;closures accelerated; restricted exports

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Brian Levich

Head of Research for Metal BulletinResearch, Brian Levich specialises in the steeland raw material sectors. He has writtennumerous major studies on the global steelindustry and has done extensive consultancyand market research work for a number ofmajor steel producers, consumers andfinancial institutions.

Stuart Reynolds

Over the last five years Stuart Reynolds haswritten a series of special reports for MBRon aspects of the global steel industry. Hewas previously technical director of theindustry consultancy division of AtkinsManagement Consultants, and over a spanof 25 years carried out steel industryplanning, investment, privatisation andrestructuring studies worldwide. He is agraduate of Cambridge University, and didpostgraduate research on steel industrydevelopment at the Institute of DevelopmentStudies and the Science Policy Research Unitin Sussex University.

Mike Mytton

Mike Mytton is a renowned industryconsultant and works in the areas of business planning, financial modelling,logistics and market studies. He has wideexperience in Europe, CIS, Asia and LatinAmerica - carrying out feasibility studies, duediligence for banks and acting as an advisorin M&A activities.

In collaboration with: Dr Zhongbo Xu

Zhongbo Xu gained a doctorate inmetallurgy at the Technical UniversityAachen in Germany, where he carried outresearch from 1985 to 1992. Since then hehas worked at the Institute of Steelmaking inthe University of Science and Technology,Beijing, where he became Director in 1997.

Biographies

• Future demand and capacity, year-by-yearout to 2013 and for 2020.

• Includes full details and print-outs from acomprehensive model of economic growth,steel demand by product group, steelproduction by process, and raw materialsdemand, for China and for each of the ten world regions.

• Includes full forecast details on MicrosoftExcel, to which users can input their own assumptions.

The forecasting model uses an innovativemethodology which simulates not justeconomic growth, but also changes ininvestment, structure of regionaleconomies, changes in steel intensity andstock change effects.

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Study updatesAt a time of unprecedented upheaval in the global steel industry this report offers twostudy updates with revised forecasts and analysis when half-year and full-year data isavailable and Chinese policy revisions are announced.

Includes a comprehensive and interactive steel forecasting model:

Contents

VOLUME 1: CHINA’S STEEL &RAW MATERIALS INDUSTRIESEXECUTIVE SUMMARY

PREFACE

1 CHINA’S ECONOMIC PROSPECTS

1.1 Economic development1.1.1 Brief history1.1.2 Current policies1.1.3 Policy directions

1.2 The present economic situation1.2.1 Structure and growth of the economy1.2.2 Current economic issues1.2.3 Foreign exchange imbalances

1.3 Future economic prospects1.3.1 China’s strengths1.3.2 Risks1.3.3 The demographic time bomb1.3.4 Forecasts of GDP growth1.3.5 The threat to investment levels and steel

demand

2 THE CHINESE STEEL MARKET

2.1 The main steel consuming sectors2.1.1 Construction2.1.2 Automotive2.1.3 Shipbuilding2.1.4 Railways2.1.5 Oil & gas; utilities2.1.6 Mechanical engineering2.1.7 Packaging2.1.8 Domestic appliances2.1.9 Other metal goods

2.2 Export prospects for the key consumer sectors2.3 Past trends in steel consumption and trade

2.3.1 Production and apparent consumption2.3.2 Trade

2.4 Future demand and trade scenarios2.4.1 The scenarios2.4.2 Demand and production projections2.4.3 Crude steel production scenarios

3 STEEL INDUSTRY DEVELOPMENT AND POLICIES

3.1 Legacy of the historical origins3.1.1 The origins3.1.2 The Great Leap Backward3.1.3 Development 1978-2000: formation of

today’s older works3.2 The investment boom 2000 – 2008

3.2.1 The 2005 steel policy3.2.2 Closure policy

3.3 Institutional arrangements and powers3.4 Future policy influences

3.4.1 Impact of the 2008 global financial crisis3.4.2 The 2009 steel revitalisation plan

3.4.3 Updating the 2005 steel plan3.4.4 Finance for M&A and overseas

investment3.4.5 Environmental issues3.4.6 Raw materials supply3.4.7 Trade policy

4 STRUCTURE OF THE STEEL INDUSTRY

4.1 Current structure and capacity4.1.1 Size distribution and type of companies4.1.2 Consolidation and restructuring4.1.3 The major companies

4.2 Expansions and closure plans4.2.1 The flat products expansions 2004-20104.2.2 The new greenfield coastal works4.2.3 Closures4.2.4 Likely future supply and demand balance

4.3 Ownership patterns, trends and management4.3.1 The role of central and regional

governments4.3.2 Regional distribution of steel and raw

materials companies4.3.3 Recent M&A4.3.4 Privatisation, foreign investments and

collaborations4.3.5 The search for raw materials

4.4 Costs, profitability and competitiveness4.4.1 Technology4.4.2 The cost base4.4.3 Cost trends4.4.4 Recent financial performance

4.5 Investments in mining

5 STEEL COMPANIES AND THEIRSTRATEGIES

5.1 Shanghai Baosteel Group5.2 Anben Steel Group5.3 The Hebei Iron and Steel Group: Tangshan /

Handan / Chengde5.4 Shougang5.5 Wuhan Group5.6 Jiangsu Shagang Group5.7 Magang Group5.8 Shandong Iron and Steel Group: Jinan / Laiwu

Steel / Rizhao5.9 Anyang Iron & Steel Group5.10 Hunan Valin Group5.11 Baotou Iron & Steel Group (Baogang)5.12 Fosun (Jianlong Group/ Nanjing)5.13 Beitai5.14 Hebei Jinxi5.15 Other Tangshan groupings

6 STEELWORKS DESIGN ANDCONSTRUCTION

6.1 EPC contractors6.1.1 China Metallurgical Group Corporation

(MCC)6.1.2 Sinosteel6.1.3 Minmetals

6.2 Research and consultancy capabilities6.3 Plant manufacturing6.4 Steel industry capital costs6.5 Future outward investment

6.5.1 Outward investment by steel companies6.5.2 Export policy of the plant manufacturers

7 RAW MATERIALS AND LOGISTICS

7.1 The iron ore mining sector7.1.1 The supply of iron ore7.1.2 The mining industry7.1.3 Costs and profitability7.1.4 Reserves and exploration7.1.5 Overseas investment7.1.6 Inward investment in iron ore mining7.1.7 Iron ore pricing

7.2 Coking coal7.2.1 Coal mining7.2.2 The coke ovens sector

7.3 Other critical inputs7.3.1 Scrap7.3.2 Ferro-alloys7.3.3 Power7.3.4 Refractories and electrodes

7.4 Transport and logistics7.4.1 Transport issues7.4.2 Ports and shipping7.4.3 Railways7.4.4 Steel stockholding and distribution

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VOLUME 2: GLOBAL STEEL &RAW MATERIALS AND THEIMPACT OF CHINA 1 WHAT HAPPENED TO THE WORLD STEEL

INDUSTRY IN 2008?

1.1 The main changes in the macro economy1.2 Steel supply and demand1.3 The changing pattern of trade1.4 The impact on company profits

1.4.1 Capacity utilisation1.4.2 Product prices1.4.3 Steel company profits

1.5 The impact on raw materials suppliers1.6 End user sectoral performance in 2008

1.6.1 Construction1.6.2 Mechanical engineering1.6.3 Transport equipment

1.7 Summary and conclusions

2 STEEL DEMAND SCENARIOS BY REGION

2.1 Forecasting methodology2.1.1 The cross sectional approach2.1.2 The time series approach2.1.3 The methodology adopted for projecting

steel demand by region2.1.4 The scenarios of steel demand

2.2 Scenario A: The “rapid recovery” scenario2.2.1 The economics2.2.2 Steel demand in the IMF scenario

2.3 Scenario B: The ”extended recession” scenario2.3.1 The economics2.3.2 Steel demand in the stress test scenario

2.4 A scenario for 20202.5 The implications of the two scenarios for

steelmakers

3 STEEL PRODUCTION AND TRADESCENARIOS BY REGION

3.1 Forecasting methodology3.1.1 China and the future trade in steel

3.2 Scenario A1: Rapid recovery, China’s exportsunconstrained3.2.1 The projected trade flows3.2.2 The implications for production

3.3 Scenario A2: Rapid recovery, China’s exportsconstrained3.3.1 The projected trade flows3.3.2 The implications for production

3.4 Scenario B1: Extended recession, China’sexports unconstrained3.4.1 The projected trade flows3.4.2 The implications for production

3.5 Scenario B2: Extended recession, China’sexports constrained3.5.1 The projected trade flows3.5.2 The implications for production

3.6 A scenario for 20203.7 The scenarios compared

4 THE IMPLICATIONS FOR RAW MATERIALS

4.1 Forecasting methodology4.2 Crude steel production by process route

4.2.1 Scenario A2: production by process route4.2.2 Scenario B1: production by process route

4.3 The demand for scrap4.3.1 The factors affecting scrap supply4.3.2 Global and regional demand for scrap4.3.3 Scrap price forecasts

4.4 The demand for iron ore4.4.1 Global and regional demand for iron ore4.4.2 China’s iron ore demand and its

implications for the rest of the world4.4.3 Iron ore price forecasts

4.5 The demand for coke4.5.1 Global and regional demand for coke4.5.2 China’s coke demand and its

implications for the rest of the world4.5.3 The demand for coking coal4.5.4 Coal and coke price forecasts

4.6 A scenario for 2020

5 CONCLUSIONS: CHINA IN THE WORLD –THE ‘NEW’ CHINA EFFECT

5.1 China in world development5.2 The development of world steel5.3 China’s trade partners

5.3.1 Taiwan5.3.2 Japan and S Korea5.3.3 India5.3.4 ASEAN5.3.5 Australasia5.3.6 North America5.3.7 Africa and Latin America

5.4 Limits to Chinese exports: world trade policies5.5 China’s impact on world prices5.6 Import dependence in raw materials and energy5.7 The impact of future inward investment to

China5.8 The impact of outward investment from China

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Global Steel & Raw Materials Industries and the New China EffectMarket Outlook to 2020

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