Be watchful of China's steel expansion

That many of our steelmakers suffer from an inexplicable sinophobia is well known by now. Every time there is a spurt in our steel imports, the needle of their suspicion gets pointed at China. Like in the first half of this financial year, India’s steel imports were up 32.6 per cent to 4.4 million tonnes at a time when local production of 30.63 million tonnes was ahead of demand by 810,000 tonnes. But India is also an exporter of steel.

At the present state of the Indian steel industry, imports of certain types of the metal for use by the automobile, machinery and construction sectors are unavoidable. Many automakers here are not yet ready to use locally made cold-rolled sheet for outside panels and trims in more expensive cars. And let us not lose sight of the fact that car sales rose 27 per cent in this year’s first half and its implications for flat steel imports.

Starting 2007-08, the country has become a net importer of steel as exports have shrunk in line with rise in domestic steel use. But as far as this year’s steel imports go, there are no evidences to paint China as the villain. In this context, the plain speaking SAIL chairman C S Verma has done well to point out that import threat from China is “only marginal.” In support of this, Verma refers to the 40 to 45 per cent fall in our steel imports from China in the past five months. However much he tries to put the subject in perspective, the fear of China targeting India among the major destinations for leaving its surplus steel refuses to go away.

Apparently, the fear is because of the towering size of the Chinese steel industry and that country in defiance of world steel production slipping in the past two years on recession reason went on raising its output. In normal commercial consideration, it will be argued, China will try to export surplus steel to markets where demand is growing.

Both on this ground and also for its proximity, India should be the ideal place for China to sell some of its surplus steel. But China does not necessarily work on predictable lines. Verma has given quite a few leads as to what China is doing with its steel industry. Unpredictable that China is, SAIL chairman recommends “watchfulness” of the moves by the steel industry there.

A point not to be missed is that China, which is the world’s largest consumer of energy is facing serious energy crunch. Between 2006 and now, the country has cut energy use per unit GDP by 15.6 per cent. But this still falls short of the eleventh five year plan of power conservation target.

From raising power rates to asking energy intensive industries like steel, aluminium and copper to cut production and also to pass edicts to shutter inefficient and polluting units, China is using all means to improve efficiency in energy use. It is no surprise that China will be viewing selling of steel or aluminium in the world market as export of energy, which is in short supply.

A subsidy automatically gets embedded in exports of steel products or even more so in aluminium. Has not China said that it will progressively phase out export rebates on steel and all non-ferrous metals? Some such rebates are already off on certain steel items.

China has steel capacity of 740 million tonnes. How much of that capacity the country will do well to do without remains a subject of debate. In the first eight months of 2010, the country produced nearly 426 million tonnes of crude steel and its year’s output will be in excess of 600 million tonnes compared with 567,842 million tonnes in 2009. Should this be cause of concern for us? In one word, no. World Steel Association says China’s steel use this year will increase 6.7 per cent to 579 million tonnes.

Remember this is happening in the wake of a spectacular consumption rise of 24.8 per cent in 2009. The important thing for some in our steel fraternity is that China in the first place will not have any significant quantity of surplus metal for export.

The world has seen in the past how the preparation for the 2008 Olympics in Beijing and construction of the three gorges dam across the Yangtze River led to the phenomenal growth of China’s steel industry. Now, as Beijing is creating a new Shenzhen in the country’s western most city Kashgar, millions of tonnes of steel and other metals will be needed. The message that comes from China is that it wants to make steel cost effectively and principally for domestic use.

In pursuance of this principle, Beijing wants as many as 30 mills in Hebei province to cut production by up to 70 per cent in the final quarter of 2010. Yet another 18 mills in Hebei have been asked to shut production for up to a month. Hopefully the moderation in Chinese steel production since July will continue till the year end.