Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Steel: Countering the Chinese dragon! - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Nov 10, 2006

    Steel: Countering the Chinese dragon!

    The global steel industry is highly cyclical, very competitive and fragmented in terms of market share. Currently the industry is at the height of the business cycle and is going through a consolidation phase, which might result in the smaller players being acquired by the larger ones. The total output from the industry exceeded 1.4 billion tons in 2005, most of it accounted for by the increase in output from China. Currently, China produces over one third of the world's crude steel and consumes in the same proportion. It is the largest iron ore importing country.

    Chinese steel industry overview:

    The Chinese steel industry continues to be primarily state-owned extremely fragmented and highly subsidized. Although minority positions in some of the larger producers are privately owned, the Chinese government holds a majority interest in every major Chinese steel producer. There are approximately 800 steel mills in China. In 2000, China produced 126 million tonnes (MT) of steel that was scaled up to 348 MT in 2005, an increase of 176% in only 5 years. The country from being a net importer is now becoming a net exporter. Exports have shot up by 48% YoY in 2005. In absolute terms, imports stood at 9.4 MT and exports at 17.1 MT in the first half of the current fiscal. So much has been the production growth that Chinese imports of iron ore shot up by 23% YoY.

    The Chinese steel industry in its current form is the creation of the Chinese government. It has benefited from massive direct and indirect subsidies. The Chinese government has subsidized the steel industry, the effects of which are manifold. Few examples of the various direct subsidies provided to the steel industry are; transfer of ownership, cash grants, debt for equity swaps, benefits for export performance, energy and raw material grants, import barriers, etc.

    Consequences on global steel industry:

    China's massive subsidization of its steel industry is having consequences that are truly global. The world in many ways constitutes an integrated market for steel. Through a dramatic expansion in capacity fueled largely by subsidies and government-directed lending, the Chinese steel industry is destabilizing the market. Excess capacity in China is estimated to be in the range of 65 MT to 100 MT. Excess capacity of this order, at the time when investment in steel has not come to a stop, will affect domestic and global steel prices. Already, the prices in China are much lower as compared to other neighbouring countries. Low prices have already hit Asian markets. Also, with the additions in capacity and production scaling up, demand for raw materials will rise and with supply constraints, raw material prices will increase.

    China is thus depriving steel producers in other countries of valuable sales by building up its steel industry to artificial levels. This is significant, because steel is a highly cyclical industry; producers depend upon high production and prices in good times to help them weather the inevitable downturn. Chinese exports have flooded world markets, driving down prices.

    Implications for Indian companies

    India being a large exporter of both the iron ore as well as finished steel to China, the recent developments will obviously have a bearing on the domestic steel industry. Indian steel companies are amongst the lowest cost producers and India being rich in mineral resources, they may not feel that significant a brunt of lower prices, as compared to producers in other countries, atleast in the near term. However, over the longer term, they need to take certain steps to ensure that the impact of a fall in prices does as little damage as possible. These companies need to increase the share of value added products and better product mix to have a business model that is sustainable in the long-term. In this regard, the recent move of Tata Steel, one of India's leading steel manufacturers, to acquire Corus, the Anglo Dutch steel giant, is indeed a step in the right direction. This we believe is a perfect example of how maximum synergies can be exploited by marrying the low cost production skills of one company with a high end product manufacturing expertise of another company. Thus, although the Indian companies might not be able to avoid the cyclical nature of the industry, by having a completely integrated operation, they can atleast minimise the damage.



    Equitymaster requests your view! Post a comment on "Steel: Countering the Chinese dragon!". Click here!


    More Views on News

    Tata Steel: A Strong Quarter (Quarterly Results Update - Detailed)

    Aug 12, 2017

    Tata Steel reported a robust operating performance on the back of strong domestic and European operations.

    SAIL: Loss at EBITDA Level Due to Higher Raw Material Cost (Quarterly Results Update - Detailed)

    Jun 12, 2017

    The company registered a negative EBITDA of Rs 2.64 billion during the quarter. This is on the back of an increase in raw material prices.

    Tata Steel: Strong Quarterly Performance (Quarterly Results Update - Detailed)

    May 22, 2017

    Tata Steel reported a robust operating performance on the back of strong domestic and European operations.

    SAIL: Pressure Continues. Loss at Operating Levels... (Quarterly Results Update - Detailed)

    Feb 15, 2017

    SAIL has reported a 26.2% YoY increase in the topline while the bottomline reported a loss of Rs 7.94 billion.

    Tata Steel: Loss from Discontinued Business Mars Performance (Quarterly Results Update - Detailed)

    Sep 27, 2016

    Tata Steel has reported a 6.3% decline in the topline while the bottomline was in red in 1QFY17.

    More Views on News

    Most Popular

    This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)(The 5 Minute Wrapup)

    Aug 17, 2017

    A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.

    Dear PM Modi, India is Already Land of Self-Employed, and It Ain't Working(Vivek Kaul's Diary)

    Aug 21, 2017

    Most Indians who cannot find jobs, look at becoming self-employed.

    It's the Best Time to Buy IT Stocks(Daily Profit Hunter)

    Aug 16, 2017

    The IT Sector could be in an uptrend till February 2019. Are you prepared to ride the trend?

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    Think Twice Before You Keep Money In A Savings Bank Account(Outside View)

    Aug 22, 2017

    Post demonetisation, a cut in bank savings deposits rates was in the offing.

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 24, 2017 12:28 PM