The steel prices on the global market have fallen a bit, although not significantly. What is more important here is that the prices have stopped increasing, much against the general expectation. The weakness in the market is expected to be temporary as it is due also to the seasonality factor. One may expect the prices to rise further in September.

What is of concern again is the market dynamics in China. Chinese steel production continues to grow strongly. The consumption growth has lagged behind.


As a result, the country is accumulating stock every day. Their exports have shot up sharply by as much as 48% in the first half of the year with imports dropping by a significant 29%.

In absolute terms, imports stood at 9.4 million tonne and exports at 17.1 million tonne in the first six months. So much has been their production growth that their imports of iron ore shot up by 23% year on year.

China’s steel production growth can only be seen as an exaggerated and mindless response to the demand growth in the country in the past few years. While one cannot avoid development of overcapacity in a relatively uncertain and volatile market, the way the Chinese steel industry is growing is certainly devoid of any sense.

Like in most other industries, the Chinese focus will now be on raising their stakes on the global market. There have been structural imbalances in the product mix, scale of integration and the choice of technology.

The steel prices in China are far less than those in the rest of the world. The difference is as much as $110 per tonne. This differential is not fully explained by factors like quality and product specification variations.

In fact, the China’s export offer prices for HR coils have been close to the going world export prices. It may be a different matter if they can get those prices at all.

Last year, there was a flood of poor quality and untested materials on the world market which had a strong negative impact on the global price line. Today, this does not seem to be the case.

The Chinese offers have been learnt to be for better and internationally comparable products. The finances of the Chinese mills are not in great shape. Most of the new mills lost money last year.

This year, they may be able to make small profits with the higher prices. But, their costs have also gone up with the 19% hike in iron ore prices.

The government is trying to see that the iron ore prices to the steel mills are not so high. What the government and the industry have found there is that the presence of a very large number of traders in between the buyer and the seller raises the costs of iron ore to the steel mills.

Also, too many buyers, traders or final consumers, make buying side weaker in the negotiations, especially in the spot deals. The government and the industry are now contemplating reducing the number of traders by cutting down on the licenses issued and making the traders only commission agents of the steel mills.

If this happens, the bargaining strength of the Chinese steel mills will rise which will make the Chinese mills more competitive in respect of iron ore. The point is that the Chinese steel growth has continued unabated despite this huge iron ore problem and the cost disadvantage on that account.

The Chinese steel output can go further if the iron ore supply and pricing scenario improve in the days ahead. The rising Chinese steel production will have significant implication not only on the pricing of steel in the years to come but more on the steel capacity growth elsewhere.

Even in countries like India or Brazil, with abundance of iron ore, steel industry development may be brought down below their potential if the Chinese continue their surge in capacity development at the current rate.

They build their plants much faster and at a lower cost and despite the government’s efforts to tighten finances for them, the entrepreneurs are finding enough money to do what they want to. Continued Chinese steel growth will have a negative impact on the industry elsewhere on other counts too.

First, they will lift the iron ore demand and consequently the prices. The steel producers elsewhere dependent on global sources of iron ore will see their operations unviable. Second, the rise in iron ore prices will make iron ore exports more attractive than producing steel in the countries rich in iron ore.