The China Effect

Not sure when China entered my consciousness as a factor that started to affect the steel industry in the U.K. It may have been when China was building up its infrastructure and its capability to produce steel in new steel factories. At the time this meant a heightened demand for steel, and things went well as long as China’s internal demand for exceeded its capability to produce it.

However, the first time things really started to hit home was when the raw material prices, especially that of coking coal, climbed to previously unseen levels because of China’s insatiable demand for raw materials. Which was just after Port Talbot had closed one of its two coking coal batteries. So much for people in a senior position having a vision for the future.

Still, as long as most of China’s steel was used internally that was something people could live with. In a way the crash of 2008 was somewhat of a bonus, in that raw material prices took a bit of a dive, whereas steel prices stayed pretty much on the same level. Still, coming out of crash, things did not improve, and I wonder whether the Chinese economy was starting to slow down sufficiently for them to suppress steel prices across the world.

Still, it was only in 2015 that the floodgates really opened, with reports of Chinese steel waiting in Newport docks for customers. Our annual plan of making a loss of 50 million for the financial year 2015/16 was shot to pieces when we passed the planned limit after only 3 months. I don’t know why steel prices started to make a bit of a recovery in the second half of 2016 – maybe measures to counter the glut of dumped started taking effect, or maybe the lower pound just made the difference.

Anyhow, with the benefit of hindsight we should have been able to see this coming : if you first help someone build up a steel production capability second to none, should you be surprised that this capability first increases the demand for and the price of raw materials ? And surely you must expect that if the production capability starts exceeding the internal demand, then the excess steel will have to find another outlet ?

Maybe no-one connected the dots, or if they did, then maybe they didn’t expect it to happen so quickly. Whatever the case, a China with a surplus capacity larger than the total steel production capacity in Europe may well remain a headache for some time to come.


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