Saturday, April 26, 2014

Industry analysis: Global Steel Capacity; A problem of plenty


While the consumer gets a bargain during dumping, it shows stress signs at the producing country. Is China’s steel industry really under pressure or is it a one-time event? Let us try to understand the scenario which is playing out starting with understanding the installed capacity around the world.

Global steel capacity:

China produces half of the steel world consumes. When did it start to add so much capacity? 
Is there really demand for it? 
What are the utilization levels?


It all started in the last decade, capacity almost doubled in less than a decade. And most of the capacity was installed in China. See the chart below.









Since the demand for steel is 1.2 to 1.5 times of GDP growth, demand for steel slowed along with slower GDP growth. So utilization of at the steel mills of China too declined. (http://www.reuters.com/article/2013/11/20/china-industry-idUSB9N0I602N20131120)

Conclusion: 
Large scale dumping appears to be an attempt to clear off the inventory. But it can continue in a lesser scale, as China can always offer lesser prices than producers in many other countries for several reasons. If there is any uptick in global economy, it would stop. In case of global steel demand softening further, China's steel companies would follow the footsteps of its solar industry, go out of business, until demand-capacity finds an equilibrium.