Over the past year, global steel equity values have exhibited tremendous volatility, often moving 5% or 10% in a single day. These gyrations have typically been in response to the latest iron ore price movement or economic news out of China. However, on closer inspection, the view that general economic trends in China drive global steel companies’ earnings appears lacking in substantiation.
While it is true that China continues to drive global steel market dynamics based on its roughly 50% total output share and its still-growing exports, it is no longer true that China’s overall economic growth drives its domestic steel market and implicitly, global steel markets. In other words, there has been a decisive decoupling of China’s domestic steel market growth from its overall economic growth statistics.
Between 1991 and 2013 the Chinese economy, as measured by GDP, moved in almost perfect synchronization with the domestic consumption of steel (see graph below). Economic growth in China was in large part driven by increased manufacturing production and infrastructure spending, both of which are heavily steel intensive.
However, that changed dramatically beginning in 2014 as the Chinese economy grew at an annual rate of 7.5% while domestic steel consumption actually decreased by an estimated 3.5%. This year, the Chinese economy is expected to grow at around 7% while the domestic steel market is expected to decline 0.5% and a further 0.5% next year according to the World Steel Association. (See graph below.)