In 2014, China represented around 46% of the global market for steel products. So with the Chinese economy now slowing down, the demand for steel, iron ore and other ferrous metals has declined significantly. The policies, subsidies and dumping margins imposed by the Chinese government have impacted stock prices of many global steel companies, with major metal companies like Anglo American and Rio Tinto taking a hit. (For more, see: Strongest Steel Stocks in the Materials Sector.) It's worth looking at the state of the global steel industry and the impact that the Chinese economy is having on it.

Anatomy of the Global Steel Industry

Steel is one of the most innovative and flexible alloys, which can be customized for nearly any requirements. Variants of steel are used in housing, transportation, industrial, automobile, infrastructure and utilities sectors, making it one of the world's most versatile materials, one that's easily reused and recycled. (For more, read: Strength In Steel.)

China, Japan, the U.S., India and South Korea are the top five steel producing nations in the world, with China way ahead of the rest. In 2014, China produced 822 million metric tons of crude steel, which was around 49% of world’s total crude steel production, while Japan (110 tons), the USA (88 tons), India (86.5 tons) and South Korea (71.5 tons) were far below the leader. While China and Japan are the top exporters of steel, the U.S. and the European Union (EU) hold the top spots for imports, owing to their economies' high consumption rates.

China also tops the list of users of finished steel products. China uses 46.2% of world’s total finished steel products, with the EU coming a distant second, with only 9.5%. Thus China isn't only the world's largest producer of steel, it's also the largest consumer of the material. Given such a dominant market share, along with the large amounts of steel used across different sectors of its economy, any slowdown in the Chinese economy will have a major impact on the global industry.

As indicated by the performance of a steel industry ETF called the Market Vectors Steel Index ETF Fund (SLX), the global steel industry posted a dismal performance throughout 2015.

Image Courtesy: Yahoo! Finance

Chinese Impact On the Global Steel Market

Barring the past year, economic growth in China over the last decade was fueled by increased manufacturing, high industrial output and large-scale infrastructure spending. All these factors were massive drivers of steel demand in China, which raised its share of consuming global steel products from 28.3% in 2004 to 46.2% in 2014.

So with the recent slowdown in the traditional, export-driven, manufacturing-based Chinese economy, the demand for steel in China has fallen as well. Additionally, there has been a marked shift in Chinese government policies towards the technology and services sector, with a focus on increasing consumer spending. With such pivotal changes taking the spotlight away from manufacturing and industrial segments, the demand for steel in the world’s most populous nation has fallen and should decline further.

As China still remains the top consumer and top producer of steel, it can meet its reduced steel demands from its own domestic production. Despite its lower domestic demand, China hasn't reduced its steel production. For global steel producers, who have been riding high on the back of continuously increasing demands from China in the last decade, they now have to contend with evaporating demand in the world’s most dominant steel market.

Visible Pains

Signs of the struggling steel industry are seemingly everywhere you look. Bloomberg recently reported that Anglo American, one of the world’s largest mining companies, was scrapping its dividends for 2015 and 2016, selling off assets, closing mines, shrinking company size by two-thirds and downsizing its workforce from 135,000 to only 50,000. The company attributes some of its hard decisions to China's slowing economic growth.

Similarly, Rio Tinto Group has been progressively reducing its forecast for capital spending, from $8 billion in 2014, to $6 billion in early 2015, and now to $5 billion for 2016. They also attributed these developments to "China’s slowest pace of economic growth in a quarter of a century."

Recent Developments

With the Chinese yuan hitting a low against the dollar in early December, Chinese foreign reserves have depleted to low levels. Increasing pollution, which is raising environmental concerns, has led to a further sluggish industrial outlook. China can reduce its output to help increase steel prices, but that comes with the caveat of limiting the amount of raw material available, a shortage that could further weaken its industrial growth.

Global steel and mining companies are also concerned that steel prices could be artificially kept lower through Chinese government measures of excess capacity and subsidies. China has influential control over the pricing of key commodities (through subsidies and capacity controls), which aggravates the pain points for global steel companies, who are already taking a hit from lower commodity prices. Such measures may be indirect, and so are difficult to track. For example, a steel factory in China could be subsidized for its power or petroleum supplies, or will receive cheap bank loans, thereby allowing the factory to export steel at a low cost. Given such unbalanced markets, global steel companies may not be able to sustain profitability.

The Bottom Line

Rapid urbanization across the globe, with more than a billion people expected to move to cities between by the year 2030, should continue to fuel major demand for steel (along with other infrastructure commodities). And as China remains the largest consumer market for steel products as well as being the largest producer of crude steel, it will have a significant influence on the steel prices.

In the short to midterm, China's economic situation needs to improve before the global steel industry has better prospects. The likes of the World Trade Organization (WTO) may need to impose strict rules for anti-dumping measures in order to keep market prices fair and balanced. For the time being, however, China's dominance of the steel market should continue. (For more, read: Is Now The Time To Invest In Steel?)

Quoted figures as available in the World Steel Association 2014 Annual Report.

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