By Kunal Bose
How has China become an awe-inspiring manufacturing powerhouse backed by crude steel capacity of 1.078 billion tonnes and aluminium smelting capacity of 45.19 million tonnes? Any number of dissertations on the subject analysing the economic and political factors propelling the country’s rapid industrialization since the late 20th century are available. All scholarly inquiries into the subject will credit the “economic miracle” to Deng Xiaoping, the unquestioned leader of the People’s Republic of China for over a decade up to November 1989. The architect of modern China created favourable condition for foreign investment through an “open door policy.” China’s ascendance to being the world’s second largest economy is largely due to Deng era reforms.
India has been for some time also nursing the ambition to become a factory to the world. In the pursuit of the goal, New Delhi is putting hope that the ‘China plus one strategy’ of US corporations to start with but now also being pursued by business groups in Japan and Europe will see many enterprises in these regions building factories in India. For nearly three decades, companies in the West and Japan had been investing heavily in China to take advantage of its low labour and manufacturing cost. But over time as that advantage started fading, geopolitical tensions and trade related disagreements centered around Beijing grew.
The wariness resulting from all this has convinced foreign investors about the risks of high supply chain dependency on China by remaining too heavily invested in one country. In their attempts to reduce excessive dependence on China outfits, which may be seriously disruptive of their overall operations in times of crisis (say a real time conflict arising from Chinese designs on Taiwan and claims over South China Sea), the worried companies are moving parts of China based capacity to southeast Asian countries and India, among others.
The other day India’s G20 Sherpa Amitabh Kant didn’t mince words when he said China’s emergence as the powerful manufacturing nation was largely, thanks to the US. “If you look at the top 30 companies there, 95 to 98 per cent of their manufacturing is outsourced to China,” he said. And the rub lies in this level of dependence on a country with which the West has growing differences on a raft of political and trade related issues. Besides helping them to source components and semi-finished and finished products for their own use, a large domestic market was an important consideration for building factories in China by the multinationals based in the West and Japan.
But the domestic demand in China is no longer growing in the ways of the past. A recent finding by the American Chamber of Commerce in Shanghai says US companies working in China are reporting record low profits and also a sharp fall in business confidence. Of the working of 306 companies analysed by the Chamber, just around 66 per cent was found profitable in 2023. No wonder at least 25 per cent of US firms have cut investment in China operations shifting focus on countries such as Vietnam, India and Malaysia and Latin America.
At the recent global steel conclave held in New Delhi under the auspices of Indian Steel Association, participants reflected at length how a saturated real estate market along with the liquidity crisis faced by property developers and decline in steel-intensive urbanization are leaving China with growing surpluses of steel which the Country is disposing of in the world market to the detriment of Chinese steel receiving countries. ‘Evolving with Steel,’ a report prepared by McKinsey & Company says: “As structural changes move China away from steel-intensive development, demand (domestic) is expected to decline from around 900 million tonnes in 2023 to around 800-850 million tonnes by 2035.” Developed economies with ideal infrastructure in place and demand for housing largely fulfilled have expectedly experienced a fall in steel demand.
Much to the disappointment of other steelmaking countries, they only have seen reduction of Chinese steel capacity to 1.078 million tonnes in 2023 from 1.116 million tonnes by way of elimination of outdated and polluting mills. Going forward, the country, which is allowing only capacity replacement but no net addition, is to experience capacity settling down in the range of 1.030 and 1.060 billion tonnes by 2035. The dual carbon emission goals of China are: carbon emission peak by 2030 and carbon neutrality by 2060.
This, however, will not be easy to achieve considering that the steel industry there emits over two tonnes of carbon dioxide for every tonne of metal it makes, which is more than double than is the case in the US and is also quite above the global average CO2 emissions. The Chinese steel linked emission problem is largely because of two factors: First, the source of energy for the industry is mostly fossil based fuel coal. Second, prevalence of old technology on a large scale. But as old mills are scrapped, the industry is witnessing a “gradual” shift to electric arc furnace (EAF)-based steelmaking.
McKinsey expects EAF share of Chinese steelmaking capacity to grow from 16 per cent in 2022 to 20 to 25 per cent by 2035. At the same time, producers of steel through BF-BOF route will remain under government pressure to modernize, use more and more renewable energy, including hydro electricity and install carbon capture, utilisation and storage (CCUS) facilities. While the rest of the world would have welcomed a far greater degree of capacity pruning and faster modernization of the Chinese steel industry, it stays gravely concerned about rising exports from the country with over half the global steel production.
In the first eight months of 2024 up to August, China’s steel shipments to foreign shores rose 20.6 per cent year-on-year to 70.58mtonnes. Never since 2016, exports happened in such large volumes. Rapid rise in exports so far this year has led McKinsey to forecast 2024 exports exceeding 100mtonnnes, compared with 93m tonnes in 2023. Some research agencies think Chinese steel exports could exceed 110mtonnes driven by domestic demand recession and likelihood of worsening trade conflicts.
Not only China, but also South Korea, Japan and rather surprisingly Vietnam continue to selling so much steel to India lured by a market where use of the metal jumped 13.6 per cent to 136m tonnes in 2023-24. Not only has China’s predatory marketing is a factor responsible for India becoming a net importer of steel but it is also making steel exports from here difficult. India’s steel imports last financial year were up 38 per cent to 8.3m tonnes when exports climbed 11.5 per cent to 7.5m tonnes. India’s steel imports continue to be buoyant causing injury to domestic industry and making New Delhi sit up and consider measures to foil imports at less than production cost.
The impact of Chinese predation by way of steel exports has been well summed up by Tata Steel CEO & MD TV Narendran who said that Indian steelmakers must have an EBITDA margin of 15 to 20 per cent so that they could fund new capacity building. But because of high imports, steel prices in India have come to their lowest in more than three years. China burdened with surplus steel is exporting its “problem” to the rest of the world. “This is a problem we faced in 2015, which is now revisiting us. China is selling steel at prices where even they are losing money. Other countries are taking steps to address this issue. India should certainly consider taking action as well.”Besides direct exports by China, it is suspected of routing supplies to the world, including through some Southeast Asian countries.
The McKinsey says: “Over the last 7-8 quarters, the steel industry has faced margin pressure across the globe. As countries step up exports to address domestic surplus capacity, margin pressures are expected to continue across the world, including India.” In a situation like this, the Indian steel industry, which has the world’s most ambitious growth plans, will be faced with the difficult task to generate surpluses to fund new projects. This has been forcefully underlined by Narendran and other industry leaders on a number of occasions.
The three principal factors that will propel steel demand growth in India are: continuous focus on building a robust infrastructure that will be supportive of manufacturing and at the same time progressively bring logistics cost down; second, the country is expected to add 140m new middle class households by 2030 with an annual income of over $10,000 and that will be demand generative for steel and other metals; third, government policies are directed to make the country a hub of industrial activity like what has already happened in China.
Likely erring on the side of caution, McKinsey has forecast Indian steel demand to be in the range of 240 to 260m tonnes by 2035, based on a CAGR of 6 per cent. The industry, according to this consulting & research agency, has in order to meet the incremental demand has announced fresh capacity building of up to 80m tonnes in the “next decade, mostly through the currently prevalent coal-based integrated BF-BOF route.” In this endeavour, all the leading steelmakers from Tata Steel to JSW to ArcelorMittal-Nippon Steel to SAIL are participating. (IPA
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