Steel’s burden ...

Kunal Bose

Not only does growing big volumes of excess global capacity unsettle the market but the phenomenon has disturbing implications for the environment.

Being by far the largest owner of steelmaking capacity in the world and what automatically follows the biggest producer, consumer and worryingly exporter of the ferrous metal, China will perforce leave a significant impact on the working of the industry in all situations. According to the OECD Steel Committee, global steel capacity rose 57mt (million tonnes) in 2023, marking the sharpest increase in a decade to 2.498bn tonnes. Accurate capacity data about China may not be available since there are producers in the unorganized sector whose operation is enveloped in obfuscation. But even then a safe guess is the world’s second largest economy had steelmaking capacity of around 1.35bn tonnes by the end of 2023.

Armed with capacity of this order, China for the fourth straight year produced over 1bn tonnes of steel last year, almost identical to 2022 when global production remained unchanged at 1.888bn tonnes. In the face of slowing down of the economy manifest particularly in the construction sector taking toll of domestic steel demand, Chinese steelmakers turned aggressive in selling their products in the world market.

Exports rose a robust 36.2mt year on year to 90.3mt in 2023, a level not seen since 2016. In the past in 2015, China exported a record volume of 110mt, a sharp rise from 91.3mt the year before.

Besides a dip in domestic demand, Chinese exports got a shot from tight international supply and competitive prices. Such large exports are inevitably disrupting international trade in the commodity and causing trade frictions. It will be recalled that there was a raft of antidumping measures by import afflicted countries in the wake of 2015 aggressive sales pitch by China. Steelmakers around the world, including the ones in India, as a result, became wary of China. The leviathan that China’s steel industry is will be producing over a billion tonnes in the next few years despite poor local demand to be left with no alternative but to offload much of surplus output in the world market with disturbing consequences for export targeted countries.

Export Structural Change

In the meantime, exports are undergoing structural changes with the focus gradually shifting to high value-added products. For example, 14mt exports of hot rolled coils in the first nine months up to September last year far exceeded that of whole of the record year 2015. The phenomenon is having disturbing consequences for steelmakers in advanced economies such as Japan. Despite being the world’s largest exporter, China also is an importer of steel products. Imports of 7.64mt in 2023 marked a decline of 27.6% over the previous year. December average price of imports at $1,569.6 a tonne gives an idea of the kind of steel the country is still required to import. Tata Steel MD and CEO TV Narendran expresses concern that if Chinese steel product exports remain at last year’s level then that could bring pressure on “world steel prices impacting producer margins.” He, however, talks about a more balanced Chinese approach to production and demand. Expectations are that Beijing moves to infuse life to property and infrastructure sectors will improve demand growth prospects for the metal.

Besides exerting pressure on prices, high volumes of Chinese exports, according to Narendran, have environment damaging impact as these leave in their trail “significant carbon emissions.” He wonders if China exports of the current order are not at variance with the declared Beijing objective of reducing carbon emissions. Premium available in the world market over domestic prices is one consideration for China to be a big exporter. But Narendran says: “There perhaps will be a bit more stability in China going forward, with potential production cuts or reduced exports due to because the prices they are exporting are not sustainable.” Sharp deceleration in December and January steel production in China proves Narendran right. In the

TV Narendran, Tata Steel MD and CEO.

meantime, concerns about Indian imports of finished steel staying ahead of exports are leading local producers to seek intervention of New Delhi by way of safeguard measures against import surges in the first nine months ended December of 2023–24 financial year.

Indian Import Discomfort

Indian producers are not comfortable that imports grew 26.4% to 5.6mt in the ninemonth April–December period over the previous year when exports at 4.7mt were the lowest in six years. In spite of this, New Delhi will not be rushed into building new barriers to imports in view of the continuing strong domestic demand. Indian consumption of steel rose a smart 14.8% to a six year high of 100mt during the period, the only country where demand continues to race ahead like that buoyed by focus on infrastructure and construction development.

In contrast, Chinese steel demand is set to fall again this year. Narendran thinks gradual shift to investment-led growth from consumption-led growth in India is fuelling demand buoyancy for the metal. He and his peers in the steel industry in India are encouraged by budgetary allocation for the infrastructure sector going up by up to 30% every year. At the same time, railways and gas pipeline development continue to receive significant investment. Thus, according to Narendran, “surge in activity across multiple steel-consuming sectors in India is a pointer to annual steel consumption growth expectation of at least 8%.” As the world noticed in China in better times in the past, steel demand in India “will be ahead of GDP growth rate, which typically hovers here around 7–7.5%,” says Narendran.

Considerations of economies of scale and new capacity that keeps on coming on stream will be constraints to ration production. Even then, S&P Global Commodity Insights says the challenge of addressing global oversupply and weak profit margins (the phenomenon is universal) will see China steel production slowing by 0.5% this year. Mysteel China, however, pegs the country’s expected production squeeze at 0.3%. In forecasts of this nature what is to be considered is whether Beijing will introduce additional stimulus measures to support the economy, which in turn could stimulate demand for steel.

Uncertain Outlook

WorldSteel in its latest short-term global outlook report says about China: “The outlook for 2024 is uncertain. The real estate market and exports will continue to exert negative pressure on steel demand and it might contract in the absence of additional government support measures.”

Steelmakers in the country will be under incessant pressure to take a close hard look at production volume and new capacity commissioning as continuing weakness in construction activity, particularly building of new houses and rekindling of trade frictions resulting from very high exports are starkly evident.

Analysts have flagged concern about steel demand based on reports Chinese investment in real estate sector is likely to skid 6% in 2024. Not only that real estate sale will continue to fall along with squeeze in new project startups, according to China Real Estate Association. These are all bad omens for the steel industry.

How much steel did China use in recent times, particularly since the second half of 2022, when from the depression in the property market started weighing heavily on the economy? China Metallurgical Industry Planning and Research Institute told the Press recently that the country’s demand for steel fell by 3.3% in 2023 from the previous year to 890mt and there would be a further domestic steel use contraction of 1.7% in 2024. For any overall demand shrinkage, the villain of the piece as said earlier is the property sector where most players are badly stuck with debts and much of that may turn into nonperforming assets in a domino effect for banks. Real estate sector was also stressed by tight mortgage lending terms.

Beijing, therefore, was constrained to cut the down payment ratio both for first time buyers and for acquirers of second houses in mid-December in an attempt to improve market sentiment. This, however, did not happen to the expected extent. As the property sector reels under several negative developments, that will translate into a further 4% contraction of construction steel use in 2024 following a 4.8% decline to 506mt in 2023. Real estate and infrastructure together account for around two-thirds of steel demand in China.

Improvement in property sector outlook will be linked to overall better economic performance, deep reforms and weeding out of irregular practices and close bank scrutiny before sanctioning of credit lines to real estate developers. In the meantime, analysts are trying to find out to what extent any rise in steel demand from the infrastructure sector will compensate for the use decline in the real estate sector. That Beijing will attempt a 5% GDP growth in the current year on a base expanded in 2023 is made abundantly clear by prime minister Li Qiang at the recently held annual National People’s Congress. Li’s message has an important bearing on near-term steel demand as it will address the challenge to defuse risks emanating from bankrupt property developers and bankrupt cities and correct structural imbalances of the economy.

Stimulus Package

Steelmakers will, however, be eagerly awaiting the stimulus package boosting investment in infrastructure development. What will particularly aid infra development and in the process steel demand are the plans to issue one trillion yuan ($139 billion) in special ultra-long term treasury bonds. At the same time, the 2024 special bond issuance quota for local governments was set at 3.9 trillion yuan, against 3.8 trillion yuan in 2023. Manufacturing sector where the purchasing managers’ index (PMI) continues to stay below 50 (a reading below 50 points to contraction) is a call for policy support.

The importance of the sector for steelmakers in underlined by it accounting for around a quarter of the metal demand. In that space, automobiles having a share of shades less than 10% of steel demand features prominently. Encouragingly for steelmakers, production and sales of automobiles in China both recorded double digit rises in 2023 capping over 30m units. Pointing out that 2023 saw China exporting a record 4.91m vehicles in 2023 (a 57.9% jump on year), analysts say in the process considerable volumes of steel found their way out of the country. The observation is buttressed by China Iron and Steel Association (CISA) pointing out that up to 60% weight of a typical car is made of steel and a further 12 to 15% constitutes cast iron.

Use of steel along with other metals such as aluminium and copper in the automobile space will rise further in 2024 as China Association of Automobile Manufacturers (CAAM) is anticipating auto sales to rise by over 3% on year to top 31m units. Exports, according to CAAM, will grow to 5.5m units. In China’s manufacturing universe, automobile does not have the burden of killing overcapacity unlike in many other areas, which Li wants to be curbed. At the same time, he favours allocation of more resources for technology innovation and new advanced manufacturing systems. All this will be in line with President Xi Jinping’s promotion of “new productive forces.” Steel, specially the new capacity replacing the old, is part of the campaign. When many foreign multinationals, based particularly in the US, Japan and South Korea are shifting some manufacturing capacity from China to mainly south and south-east Asian countries, Li significantly has promised to lift all foreign investment restrictions in the manufacturing sector. Whatever worth that promise maybe, foreign investment in steel has stayed particularly shy in China, which remains the second most important destination for foreign direct investment (FDI) after the US.

Capacity Overhang

Notwithstanding high capacity overhang and demand fall compelling exports (fetching better prices than in domestic market) that invited dismay and criticism in importing nations, the country’s steel industry, according to China National Bureau of Statistics, managed to earn profits of RMB 56.5bn ($7.95bn) last year, a jump of 157.3% over 2022, benefiting from a low base. What is to be noted is that more than half of 2023 profits were made in the final two months. A common concern of analysts is that in spite of surplus global capacity and the industry smarting under demand fall capacity growth is happening in many parts of the world, including the two leading producers China and India.

Take China for instance, where the official capacity swap mechanism if followed in letter and spirit will result in net lower new capacity than the old capacity being replaced. According to S&P Global calculations, after offsetting for the capacity shut during 2017–19, new facilities would “lead to a net increase of 11mt of pig iron and 14mt of crude steel capacity” mainly in 2023 with some likely spill over in 2024. S&P further says: “China’s pig iron and crude steel capacity are likely to decline slowly from around 2025, as most of the long-closed facilities will have been replaced by 2023 or 2024, and new capacity on stream in 2025 will be replacing facilities still in operation.” World steel capacity increase of 57mt in 2023 was the highest in a decade and that rise is equivalent to the capacity in existence in a couple of major steelmaking economies such as Germany and Brazil. Africa, ASEAN and the Middle East saw significant capacity growth last year.

Not only does growing big volumes of excess global capacity unsettle the market but the phenomenon has disturbing implications for the environment. OECD says: “Back-of-the-envelope calculations will show… reduction in global excess capacity by approximately one-third would lead to a reduction in emissions… in the range of 2 to 14% and also much healthier business conditions for steel producers.” Alas, the pressure of overcapacity will become even more intense in the future. According to OECD, in the face of demand growth being clouded by economic headwinds, global steel capacity is to see significant rise in three years to 2026, “with 46m tonne addition underway and an additional 78mt in the planning stage.” In case global steel production remains at around last year’s level — January world output fell 1.6% to 148.1mt year on year with China showing a steep fall of 6.9% to 77.2mt — then with new capacity coming on stream, use of capacity will continue to shrink. OECD says: “World steel production as a share of capacity fell from 78.9% in 2021 to 74.5% in 2022.” What it also ominously says this level of capacity use is “not in line with a healthy and financial viable industry.”

Beyond Border Investment

Alongside growing capacity within the country compromising the principle of capacity swap, Chinese steel groups are making significant investment in building mills (some wholesale shifting of plants included) in Asia, ASEAN in particular and Africa. Chinese investment in ASEAN works out to 81% of the region’s total capacity expansion. Chinese aggressiveness in building capacity in Asia and Africa is evidenced by its cross-broader investments accounting for 65.1% of such investments by all countries. But such Chinese moves are not necessarily a blessing for countries targeted for steel capacity creation. For, China is installing by way of wholesale transfer of old induction furnaces, which are environment polluting and products made therefrom are of inferior quality in ASEAN. Naturally, China instead of earning goodwill is inviting criticism from local communities and civic societies for its actions.

China in fact is facing double whammy for its steel related activities. Besides the above, the country is inviting criticism for causing disruptions in south-east Asian market for its unbridled export of steel products, often circumventing clearly laid down rules. In reaction, the Thai government is taking steps to stop any such circumventions by Chinese exporters. Since south-east Asia happens to be a significantly large export destination for Chinese steel and exporters are taking too much liberty, it is not unexpected that Indonesia and Vietnam are rising in protest against their shenanigans. In view of growing India focus on infrastructure, housing and manufacturing, well over a century experience of steelmaking, anticipated demand growth for the metal and plentiful availability of raw materials, particularly iron ore, it is only natural that the country will be hooked to rapid capacity growth. JSW Steel is to build a 13.2mt greenfield mill at coastal Paradip in Orissa at an investment of Rs650bn ($7.8bn). ArcelorMittal Nippon Steel too has received major clearances to set up a 7mt mill at Jagatsinhpur in Orissa at an investment of $4.68bn. Such greenfield projects apart, all the major groups, including Tata Steel, JSPL and government owned SAIL have major brownfield capacity expansion programmes.

JSW Steel is to build a 13.2mt greenfield mill at coastal Paradip in Orissa.

Tata Steel, which has a major production footprint in Europe, will focus on brownfield capacity expansion in India following its some strategic acquisitions there. Elaborating on the company’s growth strategy, Narendran says: “Basically, we want to increase capacity in India where we have been making the metal for over a century. We have already around 21mt here and soon it will be 26mt as Kalinganagar mill capacity expansion to 8mt from 3mt is nearing completion. We are concretizing a few more plans to take our India capacity to 40mt by 2030.” SAIL, which has five integrated mills, will lift capacity by 15mt to 35mt in the first phase. “Whatever happens to steel will leave an impact on raw materials such as iron ore, coal, manganese ore and chrome ore. So when you are building new steel capacity, you have to think of corresponding step up of supply of steelmaking ingredients,” says RK Sharma, director general of Federation of Indian Mineral Industries.

Low Carbon Steel

Not only will the industry be engaged in building new capacity but investments will be made simultaneously to go up in product value chain. While India is seeing most capacity addition through blast furnace-basic oxygen furnace (BF-BOF) route like in rest of Asia, other regions of the world are building capacity using electric arc furnaces (EAFs), promoting circular economy. OECD says around 65 low-carbon steel projects based on “new innovative technologies” are being set up in different countries. In the meantime, as the economy everywhere is gaining in sophistication and sectors from defence to aerospace to automobile to railway require growing volumes of stainless steel, its use distinction with carbon steel is getting blurred in many ways. Stainless steel, an alloy of iron, highly resistant to rusting and corrosion, is also replacing carbon steel in construction in coastal areas. Like in carbon steel, China and India are the two leading producers of stainless steel and the former in particular though has the burden of overcapacity remains engaged in commissioning new capacity. China presently has stainless steel capacity of around 50mt and capacity utilization of 70%. Despite this, the country is to bring on stream fresh capacity of 7mt this year. Moreover, a further 6mt is in planning stage.

No doubt, such capacity build-up is based on hope that once the world economy has overcome headwinds, stainless steel demand will rise and with that better capacity use. After all, the new areas of application of stainless steel such as alternative energy, ethanol, hydrogen production and water storage and distribution hold great promise. The consulting group GlobalData Plc says in a report that the industry’s global revenue at $195bn in 2022 will grow at a compound annual growth rate (CAGR) of 5.5% through 2030. China lifted 2023 production by 12.6% to 36mt. Exports, however, were down to 4.14mt from 4.551mt in 2022. Imports deceleration were sharp to 2.07mt from 3.285mt. Chinese spurt in stainless steel production is to be seen in the context of output falling in Europe and the US in response to demand fall. This will also explain setback in Chinese exports to the US and the EU. Exports would have suffered more had it not been for 94% rise in Chinese despatches to Russia since 2020.

India, which is the second largest user of stainless steel, is seeing an 8% CAGR over the past one decade and the forecast is per capita consumption of the metal will rise to nearly 12kg by 2047 from the present 2.5kg. In agreement with the demand forecast, Jindal Stainless managing director Abhyuday Jindal says: “India will be in the forefront of growth as we anticipate demand to scale up to 20mt by 2037 from 4mt last year. While this demand growth will be supported by traditional use sectors such as transport, construction and consumer durables, more and more of the metal will find application in aerospace, defence and water management.” But why has stainless steel become the “optimal” material choice? Jindal says: “Being completely recyclable and produced through scrap route, stainless steel is more than eco-friendly. It is best cost option on life cycle costing basis.”

Environment Implications

Steelmaking is highly energy intensive and carbon intensive. A major concern for policymakers of countries where steelmaking happens is how to make production processes less carbon intensive.

Steel’s environment harming problem is because of its high dependence on metallurgical coal primarily used as a reducing agent for extraction of iron from ore and also to provide carbon content needed in steel. International Energy Agency says that for steel to be on the pathway to net zero emissions by 2050 will require perfection of technology for replacement of coal by hydrogen and carbon capture. Making steel through EAFs by recycling scrap will help in controlling emissions. Several Chinese government departments want the share of EAFs in total steel production to become 20% by 2030. In fact, as old, polluting and unviable mills are pulled down to make room for new capacity, EAFs are built in their place in China. Since 2017, the country is annually commissioning 110mt of EAF capacity as part of capacity swap campaign. But disappointingly, EAF capacity use has remained low at about 60% leading Morgan Stanley to cast doubt on EAF production constituting 15% of total Chinese steel output in near future. with the device, based on its guidelines. Upon confirming it complied with the prescribed requirements, the ELW notation was affixed to the vessel.

In any case, the world steel industry has since 1900 recycled over 25bn tonnes of steel and in the process cut iron ore consumption by around 33bn tonnes and coal use by 16bn tonnes. The industry’s energy efficiency is also on ascendance: producing one tonne of steel now requires 40% of the 1960 energy level. An environment friendly development is the commitment by growing numbers of industry constituents to use energy produced from renewable sources as a substitute for fossil fuels based energy. But the industry’s energy requirements are so large that fossil fuels will continue to figure prominently is generating power for steel mills. AM/NS India has rightly asked for government policy support to promote decarbonization of steel. An important suggestion by the company is since government agencies are significant buyers of steel, their procurement should be in favour of low carbon steel. Though recommended for India, the suggestion has significant relevance for most countries.

ClassNK has granted its ‘ELW’ (Excellent Living and Working Environment) notation to ELETTRA, a bulk carrier owned by Fuyo Kaiun Co.,Ltd. The vessel becomes the first in ClassNK registry to have the ELW.

As part of its ‘Innovation Endorsement’* service for innovative technologies and initiatives, ClassNK has established requirements to indicate on a class certificate that a ship is equipped with measures and facilities that contribute to the improvement of the on board environment in its ‘Guidelines for Excellent Living and Working Environment’.

Aiming to improve the welfare of the crew, Fuyo Kaiun plans to gradually expand the installation of ‘DENBA+ Marine’, a freshness preservation system for ships developed by DENBA JAPAN Corporation, across its fleet.

By installing it in the food storage room, the device is designed to maintain the freshness of foodstuffs, thereby improving the food environment for the crew and reducing food loss. It has obtained ClassNK’s Innovation Endorsement certification for Products & Solutions.

* In order to promote the spread and development of innovative technologies, ClassNK has offered Innovation Endorsement as a swift certification service in cooperation with technological front runners to establish appropriate evaluation criteria.

Following Fuyo Kaiun’s application, ClassNK conducted an examination of ELETTRA which is the first vessel outfitted

ClassNK is committed to supporting the industry’s efforts to improve the environment on board through its certification.