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Does China’s economic growth rate really matter (to the global steel industry)?

Volatility in global steel equity values has been tied to China, but their overall growth may no longer be driving the market.

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.)

The primary reason for this shift has been the Chinese Central Government’s policy pivot away from infrastructure and manufacturing toward services and consumer spending as the central drivers of economic growth. This pivot in turn is based on several factors including: demographics (aging population, declining workforce); the urgent need to reduce overall energy intensity and industrial CO2 emissions; the heavy indebtedness of regional and municipal governments; and declining economic productivity of infrastructure spending (due to overbuilding in the past).

As steelmakers around the globe know only too well, China has not reduced its production in line with the fall-off in domestic demand and has instead ramped up exports—from around 43 million tons (mt) in the beginning of the decade to 93mt last year and potentially 100mt this year.

While trade cases and other factors are likely to see Chinese steel exports begin to decline as of 2016, it will take years for the massive amount of surplus capacity to be eliminated. This surplus capacity and the resulting impacts on domestic and global prices remain very serious concerns for the global steel industry. However, the issue of whether China’s economy grows at 7%, 8% or 6% is not in itself decisive. Under a scenario where economic growth starts to seriously falter, it is conceivable that the Chinese government could reverse direction and revert to infrastructure spending to support growth. However, this is considered highly unlike due to the factors mentioned above.