China Peak Steel And Chemicals Demand May Have Arrived

China, Company Strategy, Economics, Environment, Oil & Gas

By John Richardson

EVERYONE involved in the iron ore business must be very worried about the recent speech by the new chairman of the China Iron & Steel Association.

“Under the ‘new normal’ China’s iron and steel consumption has already entered into the peak zone,” he told his audience.

China’s steel consumption will peak at 763 million tonnes and production at 870 million tonnes over the next few years, says the government-run China Metallurgical Industry Planning and Research Institute.

And Morgan Stanley believes that the country’s steel production will peak at 800 million tonnes this year, before slipping to just below that level in 2017-2020.

As you can see from the chart below, the iron ore industry’s dependence on China as a source of total global demand is shockingly large. So, too is the case for the other metals.

This wasn’t the case in 2000, when China was responsible for around just 12% of the world’s metals demand, but this has since risen to nearly 50%.

The story of oil, which is also detailed in the chart below, is very similar. Two thirds of global demand growth for crude came from China between 2003 and 2012, according to the Oxford Institute for Energy Studies. In 2014, demand growth for oil in China was the slowest in two decades.

Chinametalsdemand24Feb2015

It is the same story in chemicals and polymers. Today, I have just chosen polyvinyl chloride (PVC) as an example because its demand growth, like metals, is so heavily linked to construction – and it is the collapse of construction, particularly real estate, that represents one of the biggest threats to China’s economy. But in future posts, I will show how again the story is similar for other chemicals and polymers.

China accounted for 16% of PVC consumption in 2000, but by 2014 this had risen to 38% as the chart below indicates.

ChinaworldPVC2

 

“Peak steel”, peak metals demand in general – and perhaps peak consumption of some chemicals and polymers in China – would be fine if capacity growth always matched these new expectations.

But:

  • An additional 341 million tons of iron ore capacity, which, of course, is used to make steel will be added over the next five years by Rio, Vale, BHP, Fortescue and Hancock Prospecting Pty, JP Morgan has estimated.
  • Andrew MacKenzie, BHP CEO, has dismissed calls for production cutbacks in Australia. Instead, he argued that “capital resources” should be directed at the “cheapest source of production”.
  • In China alone, PVC capacity has risen from around 4.1 million tonnes/year in 2000 to 29.4 million tonnes in 2014 – an increase of some 600%. This might not be so bad if you assume that operating rates remain where they have been over the past few years – in the 50-60% range. But what happens if they are pushed much higher, leading to a rise in exports, in order to protect jobs?
  • And returning to iron ore, what happens if this also applies to higher cost mines in China?

Whatever the range of outcomes you plot, there can surely be no doubt now that too much supply is chasing too little demand growth in China. The sad thing is that this was entirely predictable. Companies could and should have planned for this.

In an inflationary world, the real value of the debts incurred to build this excess supply would decline.  This would help companies survive.

But the extent of the oversupply means that we are now in a prolonged period of global deflation when, of course, the real value of debts will increase.

 

PREVIOUS POST

China Jobs Squeeze: Why It Is Happening And What It Means

23/02/2015

Jobs, jobs and jobs are the three main priorities for politicians everywhere. I...

Learn more
NEXT POST

Following In The Footsteps Of China Is Impossible

25/02/2015

By John Richardson THE chart above shows how China’s consumption of polypropyl...

Learn more
More posts
Global polyethylene oversupply, the highest in 19 years, hasn’t gone away
03/07/2020

By John Richardson BRENT crude futures surged by 80% during the second quarter and enjoyed their bes...

Read
China could be in complete polypropylene self-sufficiency by 2022
28/06/2020

By John Richardson SORRY to labour the point but this comes from a genuine concern for the readers o...

Read
Asian polyethylene price recovery faces multiple challenges
25/06/2020

By John Richardson THERE are reports of significant cuts in Middle East polyethylene (PE) operating ...

Read
China’s long-term ambition for paraxylene self-sufficiency seems close to being realised
21/06/2020

On Friday, I examined how China’s paraxylene (PX) net imports could fall to as little 8m tonne...

Read
China’s big declines in 2020 PX and PP imports: the impact on its major trading partners
18/06/2020

By John Richardson CHINA’S refineries and petrochemicals plants came roaring back to almost fu...

Read
Paraxylene demand collapses as higher China production threatens 6m tonne fall in imports
15/06/2020

By John Richardson DON’T SAY I didn’t tell you that a decline in stock markets would happen. The...

Read
Coronavirus will severely damage the developing world unless we take the right steps
12/06/2020

By John Richardson IT IS a fantastic achievement. “Over the last 25 years, more than a billion peo...

Read
Main Street versus Wall Street and the crisis in the developing world
10/06/2020

By John Richardson RISING equity and oil markets do not necessarily point to a V-shaped recovery. I ...

Read

Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more

Analytics

Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more
X

Uncover exclusive industry upates from ICIS

Interested to uncover more articles related to this topic? Explore additional news, insights and intelligence, tailored to the markets you are interested in by accessing exclusive content from ICIS.com

DISCOVER MORE