Global Steel & Raw Materials Industries and the New China Effect Market Outlook to 2020

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1 Global Steel & Raw Materials Industries and the New China Effect Market Outlook to 2020 A long-term strategic forecast study available in two interdependent volumes, including: TWO STUDY UPDATES THROUGHOUT THE YEAR INTERACTIVE STEEL AND RAW MATERIALS DEMAND AND OUTPUT FORECASTING MODEL I would positively recommend Metal Bulletin Research as a unique provider of steel & raw materials market analysis and forecasts. Michael Amez, Manager, A.T. Kearney, USA Interactive Forecasting Model & Study Updates

2 Global Steel & Raw Materials Industries and the New China Effect Market Outlook to 2020 The global steel industry is facing the threat of competitively priced Chinese steel, such that China s importance for international steel markets has never been greater. Understanding what consequences this will have for the international steel industry will be vital for all market participants. Global steel prices are under pressure and there are clear signs that China has brought too much steel capacity on-stream without phasing out enough of its obsolete steel mills. The problems of global steel oversupply may remain hidden while China continues to invest in steel-intensive infrastructure and construction projects, but a fundamental restructuring of the Chinese steel industry looks inevitable, and increasingly imminent. While steel mills in most countries, like the US and Europe, were idling blast furnaces in early 2009, Chinese mills were increasing their output by an average of about 3%. This report examines the impact across all the key global regions over the next 5 to 10 years and the most likely scenarios we can all expect for the global steel industry. Interactive Forecasting Model & Study Updates What is the outlook for China now and the rest of the global steel industry? Will fiscal stimulus packages succeed in rescuing the world from continuing recession? What impact on China and the rest of world is the global economic crisis having by sector? Will China s changing steel policy reverse the overcapacity and avoid a world steel crisis? What is the outlook for global steel & raw materials prices? 2

3 Global Steel & Raw Materials Industries and the New China Effect is the first report of its kind to provide independent and on-the-ground research amid the current economic crisis. The report offers unique insights, a long-term outlook and strategic recommendations for those looking to invest, or already operating, in the steel and raw materials industries. This two-volume study comprises extensive on-the-ground analysis of the dynamics and structures of the global steel industry, including the upstream raw materials, plant construction, and downstream end-user sectors. It assesses how this will impact the industry in terms of strategic positioning, production, trade, consumption and pricing patterns. Volume 1: China s Steel & Raw Materials Industry Unique strategic insights into the inner mechanics of the Chinese steel and raw materials industry, from mining up to final end-users, now and out to Key questions addressed in volume 1 include: Is there an over-arching and executable plan to China s steel development? What are the new strategies for the emerging Chinese super-groups Baosteel/Guangdong Group, Hebei, Anben, Wuhan and Shandong? What are the expansion plans of public and private sector companies and when, if at all, will they be realised? What is the future for China s many smallscale iron and steelmakers? Has over-investment now backfired on China s growth and the growth of its steel industry? Have the limits to growth in China s domestic capital formation created the potential for a catastrophic collapse in investment, growth and steel consumption? What is the impact and role of China now on the steel and raw materials markets? Will Chinese steel over-capacity flood the world with low cost exports? Will Chinese exports exacerbate weak demand elsewhere and precipitate a long period of losses for western steelmakers, with closures and a new wave of take-overs? Will Chinese steel companies begin an acquisitions trail overseas as their home industry completes its restructuring? Will the collapse of plant building in China after 10 years of breakneck growth lead Chinese plant manufacturers, backed by the Chinese sovereign wealth funds, to attack the world market for plant manufacture and contracting? Will the expanding Chinese ore mining sector displace imports, or will the majors cut prices enough to recapture Chinese imports? How will China s massive investments in Australia, Africa and Latin America affect its trade, and the world market for steelmaking raw materials? How will it affect Australia s mining industry, Africa s growth and stability, and Latin America s resurgent economies? Will there ever be real opportunities for western investment in China s steel and raw materials industries? China s steel consumption by end-use sector China s net exports flat products Slabs 5 Plate l Construction 53% l Machinery 20% l Automotive 6% l Shipbuilding 4% l Power sector 4% l Railways 1% l Containers 1% l Pipelines 1% l Domestic Appliances 2% l Other 8% Mt HRC&S CRC&S Coated products Source: Metal Bulletin Research Source: Metal Bulletin Research 3

4 Volume 2: Global Steel & Raw Materials and the Impact of China The events of 2008 and 2009 will transform the world s steel industry, and the policies and actions of the Chinese government and its steel companies will have a significant effect on this transformation. Utilising analysis from volume 1, MBR applies its long-term forecasting model to analyse alternative scenarios for world steel and raw materials consumption, trade, and production, and their impact on steel investment and closures in markets outside China. Volume 2 analyses two different scenarios for capacity, consumption, production and trade, in the context of two different scenarios for the world s recovery from recession. Key questions addressed in volume 2 include: What has actually happened to demand and production during 2008 and early 2009? What is the impact of changes in the global end-user industries such as automotive, construction and mechanical engineering? What will be the global balance of steel capacity and demand, given China s likely policies on capacity and exporting? What will be the balance in global iron ore? What is the implication for the big ore mining projects currently being developed by the majors and especially those being developed by the junior miners? Where will steel closures take place? What does the future hold for the greenfield slab export projects in Latin America and SE Asia, and other steel investments? What is the implication for the GHG emissions policy in the steel industry? What will be the future profile of steel, scrap and ore prices? Fast Recovery Slow Adjustment Optimistic world growth; 8% growth in China with high investment Prolonged world recession; slow growth and low investment in China No constraints China s steel expansion plans fulfilled; export incentives Capacity constraints Expansion plans postponed; closures accelerated; restricted exports Source: Metal Bulletin Research An extensive appendix describes the projections resulting from each scenario for all regions of the world. Regions covered are: :: China :: Industrial Asia (Japan, S Korea, Taiwan) :: ASEAN :: South Asia :: Middle East & North Africa :: Africa :: Europe :: CIS :: NAFTA (North America) :: Central & South America :: Oceania Most likely case if world recession is short; China s recovery plan successful. Likelihood XX% 2012: Cap XXX Net Export XX Crude Steel XX China s plan case: Allows rapid closures of old, dirty plant; high capacity utilisation. Likelihood XX% 2012: Cap XXX Net Export -X Crude steel XXX User sectors covered for China include: :: Construction :: Automotive :: Shipbuilding :: Railways :: Domestic appliances :: Packaging :: Mechanical engineering Product groups covered in production and trade forecasts by region are: :: Semis :: Flat products and welded tubes :: Long products and seamless tubes Stress test : High exports and excess capacity: big impact on trading partners. Likelihood XX% 2012: Cap XXX Net Export XX Crude Steel XX Best response if world recession prolonged and/or China s recovery plan is less successful. Likelihood XX% 2012: Cap XXX Net Export XX Crude Steel XX Raw materials and inputs covered are: :: Iron ore :: Coking coal and coke :: Scrap :: Ferro-alloys :: Refractories and electrodes :: Power :: Transport and logistics 4

5 Study updates At a time of unprecedented upheaval in the global steel industry this report offers two study updates with revised forecasts and analysis when half-year and full-year data is available and Chinese policy revisions are announced. Includes a comprehensive and interactive steel forecasting model: Future demand and capacity, year-by-year out to 2013 and for Includes full details and print-outs from a comprehensive model of economic growth, steel demand by product group, steel production by process, and raw materials demand, for China and for each of the ten world regions. Includes full forecast details on Microsoft Excel, to which users can input their own assumptions. The forecasting model uses an innovative methodology which simulates not just economic growth, but also changes in investment, structure of regional economies, changes in steel intensity and stock change effects. Biographies Brian Levich Head of Research for Metal Bulletin Research, Brian Levich specialises in the steel and raw material sectors. He has written numerous major studies on the global steel industry and has done extensive consultancy and market research work for a number of major steel producers, consumers and financial institutions. Stuart Reynolds Over the last five years Stuart Reynolds has written a series of special reports for MBR on aspects of the global steel industry. He was previously technical director of the industry consultancy division of Atkins Management Consultants, and over a span of 25 years carried out steel industry planning, investment, privatisation and restructuring studies worldwide. He is a graduate of Cambridge University, and did postgraduate research on steel industry development at the Institute of Development Studies and the Science Policy Research Unit in Sussex University. Mike Mytton Mike Mytton is a renowned industry consultant and works in the areas of business planning, financial modelling, logistics and market studies. He has wide experience in Europe, CIS, Asia and Latin America - carrying out feasibility studies, due diligence for banks and acting as an advisor in M&A activities. In collaboration with: Dr Zhongbo Xu Zhongbo Xu gained a doctorate in metallurgy at the Technical University Aachen in Germany, where he carried out research from 1985 to Since then he has worked at the Institute of Steelmaking in the University of Science and Technology, Beijing, where he became Director in

6 Contents VOLUME 1: CHINA S STEEL & RAW MATERIALS INDUSTRIES EXECUTIVE SUMMARY PREFACE 1 CHINA S ECONOMIC PROSPECTS 1.1 Economic development Brief history Current policies Policy directions 1.2 The present economic situation Structure and growth of the economy Current economic issues Foreign exchange imbalances 1.3 Future economic prospects China s strengths Risks The demographic time bomb Forecasts of GDP growth The threat to investment levels and steel demand 2 THE CHINESE STEEL MARKET 2.1 The main steel consuming sectors Construction Automotive Shipbuilding Railways Oil & gas; utilities Mechanical engineering Packaging Domestic appliances Other metal goods 2.2 Export prospects for the key consumer sectors 2.3 Past trends in steel consumption and trade Production and apparent consumption Trade 2.4 Future demand and trade scenarios The scenarios Demand and production projections Crude steel production scenarios 3 STEEL INDUSTRY DEVELOPMENT AND POLICIES 3.1 Legacy of the historical origins The origins The Great Leap Backward Development : formation of today s older works 3.2 The investment boom The 2005 steel policy Closure policy 3.3 Institutional arrangements and powers 3.4 Future policy influences Impact of the 2008 global financial crisis The 2009 steel revitalisation plan Updating the 2005 steel plan Finance for M&A and overseas investment Environmental issues Raw materials supply Trade policy 4 STRUCTURE OF THE STEEL INDUSTRY 4.1 Current structure and capacity Size distribution and type of companies Consolidation and restructuring The major companies 4.2 Expansions and closure plans The flat products expansions The new greenfield coastal works Closures Likely future supply and demand balance 4.3 Ownership patterns, trends and management The role of central and regional governments Regional distribution of steel and raw materials companies Recent M&A Privatisation, foreign investments and collaborations The search for raw materials 4.4 Costs, profitability and competitiveness Technology The cost base Cost trends Recent financial performance 4.5 Investments in mining 5 STEEL COMPANIES AND THEIR STRATEGIES 5.1 Shanghai Baosteel Group 5.2 Anben Steel Group 5.3 The Hebei Iron and Steel Group: Tangshan / Handan / Chengde 5.4 Shougang 5.5 Wuhan Group 5.6 Jiangsu Shagang Group 5.7 Magang Group 5.8 Shandong Iron and Steel Group: Jinan / Laiwu Steel / Rizhao 5.9 Anyang Iron & Steel Group 5.10 Hunan Valin Group 5.11 Baotou Iron & Steel Group (Baogang) 5.12 Fosun (Jianlong Group/ Nanjing) 5.13 Beitai 5.14 Hebei Jinxi 5.15 Other Tangshan groupings 6 STEELWORKS DESIGN AND CONSTRUCTION 6.1 EPC contractors China Metallurgical Group Corporation (MCC) Sinosteel Minmetals 6.2 Research and consultancy capabilities 6.3 Plant manufacturing 6.4 Steel industry capital costs 6.5 Future outward investment Outward investment by steel companies Export policy of the plant manufacturers 7 RAW MATERIALS AND LOGISTICS 7.1 The iron ore mining sector The supply of iron ore The mining industry Costs and profitability Reserves and exploration Overseas investment Inward investment in iron ore mining Iron ore pricing 7.2 Coking coal Coal mining The coke ovens sector 7.3 Other critical inputs Scrap Ferro-alloys Power Refractories and electrodes 7.4 Transport and logistics Transport issues Ports and shipping Railways Steel stockholding and distribution Interactive Forecasting Model & Study Updates 6

7 VOLUME 2: GLOBAL STEEL & RAW MATERIALS AND THE IMPACT OF CHINA 1 WHAT HAPPENED TO THE WORLD STEEL INDUSTRY IN 2008? 1.1 The main changes in the macro economy 1.2 Steel supply and demand 1.3 The changing pattern of trade 1.4 The impact on company profits Capacity utilisation Product prices Steel company profits 1.5 The impact on raw materials suppliers 1.6 End user sectoral performance in Construction Mechanical engineering Transport equipment 1.7 Summary and conclusions 2 STEEL DEMAND SCENARIOS BY REGION 2.1 Forecasting methodology The cross sectional approach The time series approach The methodology adopted for projecting steel demand by region The scenarios of steel demand 2.2 Scenario A: The rapid recovery scenario The economics Steel demand in the IMF scenario 2.3 Scenario B: The extended recession scenario The economics Steel demand in the stress test scenario 2.4 A scenario for The implications of the two scenarios for steelmakers 3 STEEL PRODUCTION AND TRADE SCENARIOS BY REGION 3.1 Forecasting methodology China and the future trade in steel 3.2 Scenario A1: Rapid recovery, China s exports unconstrained The projected trade flows The implications for production 3.3 Scenario A2: Rapid recovery, China s exports constrained The projected trade flows The implications for production 3.4 Scenario B1: Extended recession, China s exports unconstrained The projected trade flows The implications for production 3.5 Scenario B2: Extended recession, China s exports constrained The projected trade flows The implications for production 3.6 A scenario for The scenarios compared 4 THE IMPLICATIONS FOR RAW MATERIALS 4.1 Forecasting methodology 4.2 Crude steel production by process route Scenario A2: production by process route Scenario B1: production by process route 4.3 The demand for scrap The factors affecting scrap supply Global and regional demand for scrap Scrap price forecasts 4.4 The demand for iron ore Global and regional demand for iron ore China s iron ore demand and its implications for the rest of the world Iron ore price forecasts 4.5 The demand for coke Global and regional demand for coke China s coke demand and its implications for the rest of the world The demand for coking coal Coal and coke price forecasts 4.6 A scenario for CONCLUSIONS: CHINA IN THE WORLD THE NEW CHINA EFFECT 5.1 China in world development 5.2 The development of world steel 5.3 China s trade partners Taiwan Japan and S Korea India ASEAN Australasia North America Africa and Latin America 5.4 Limits to Chinese exports: world trade policies 5.5 China s impact on world prices 5.6 Import dependence in raw materials and energy 5.7 The impact of future inward investment to China 5.8 The impact of outward investment from China 7

8 YES I WOULD LIKE TO ORDER: Global Steel & Raw Materials Industries and the New China Effect Market Outlook to 2020 VOLUME 1: CHINA S STEEL & RAW MATERIALS INDUSTRIES VOLUME 2: GLOBAL STEEL & RAW MATERIALS AND THE IMPACT OF CHINA PLEASE SELECT: Volumes 1 and 2: UK 7995 US$ Volume 1 only: UK 4995 US$ Volume 2 only: UK 4995 US$ Order Your Copy Today. Call +44 (0) MBR0033 Report published July 2009 :: Steel Raw Materials: Weekly Market Tracker :: Steel: Weekly Market Tracker :: Global Steel Cost Service :: Global Iron Ore Cost Service :: The Indian Steel Industry: Market Projections & Company Strategies out to 2015 :: A New Era for the Middle East & North African Steel Industry Five Year Outlook :: The Ten Year Strategic Outlook for the Global Magnesium Market :: The Lithium Industry: Market projections & company strategies to 2013 :: A Strategic Assessment of the Ferro-Alloys Industry: A Global Outlook to 2020