Role of the Chinese Steel Industry in the Economic Development of China and Australia’s Contribution to the Industry as a Supplier of Raw Materials By James G. Trench MSc, Grad Dip, BSc Hons This Thesis is presented for the degree of Doctor of Philosophy of Murdoch University - 2004 -
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Role of the Chinese Steel Industry in the Economic Development of China and
Australia’s Contribution to the Industry as a Supplier of Raw Materials
By
James G. Trench MSc, Grad Dip, BSc Hons
This Thesis is presented for the degree of
Doctor of Philosophy of Murdoch University
- 2004 -
ii
Declaration
I declare that this thesis is my own account of my research and contains as its main
content work that has not previously been submitted for a degree at any tertiary
education institution.
James G. Trench
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Abstract
The objective of this thesis is to examine the extent to which the iron and steel industry
in China has been a major contributor to the recent economic development and growth
of the Chinese economy and whether this will continue. Key elements of China’s
economic development model – THE CHINESE MODEL - based on the steel industry
are presented and demonstrate the impact of China taking “great leaps forward” in its
steel production capacity to become the world’s leading steel producer and one of the
fastest growing economies. This bold step was undertaken at times when the global
steel industry was burdened with overcapacity and economic pressures. At the same
time, this thesis examines the role played by the Australian iron ore industry in
supporting the Chinese steel industry through its iron ore trade with China and how this
role will evolve.
The development of the iron and steel industry in China reflects not just the role played
in the overall expansion of the Chinese economy through technical input-output
relationships, but it also reflects control and historical characteristics taken from China's
social and political context. Starting from the views of Sun Yat Sen, and flowing
through Mao Zedong, and then into later leaders, the steel industry was always intended
to be the basis for the modernisation of the Chinese economy. The Great Leap Forward
of the 1950s was an ill-founded reflection of that fundamental view, but the failure in
that case did not cause a shift away from that basic perspective. Instead a more
comprehensive perspective was provided and this came to the fore at the start of the
reform process in the early 1980s.
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The role of the steel industry in the recent modernisation of China is traced using the
policy foundations and directions that were adopted combined with empirical data on
the investment and growth in the industry, as well as the role of the output of the steel
industry in the expansion of other industries in China. To the extent that conditions in
China may be replicated in other countries, the Chinese experience using the iron and
steel industry as the key element in the industrialisation of that economy will have
important lessons.
At the same time, this thesis demonstrates weaknesses in a development model that has
the iron and steel industry as the leading sector. One major weakness is the reliance on
imported raw materials and at this point the Chinese experience with Australia as a
source of raw materials becomes relevant. Australia’s role as a reliable supplier and
partner for the steel industry enabled the steel industry to expand in a low risk
environment with respect to the price and availability of raw materials.
1.1 THE OBJECTIVE OF THIS THESIS .........................................................................3 1.2 ACADEMIC REVIEW............................................................................................4 1.3 RESEARCH METHODOLOGY ...............................................................................8 1.4 OVERVIEW OF CHAPTERS.................................................................................10
2 OVERVIEW OF THE GLOBAL IRON AND STEEL INDUSTRY ...............13
2.1 STEEL INDUSTRY - DRIVER OF THE ECONOMY .................................................14 2.2 INDUSTRY STRUCTURE AND BEHAVIOUR - BARRIERS TO ENTRY .....................21 2.3 ECONOMICS OF THE STEEL INDUSTRY - FACTORS OF PRODUCTION..................22
2.3.1 Iron Ore - Principal Input Material to the Steel Industry ......................28 2.4 LEADING STEEL PRODUCING COUNTRIES ........................................................29 2.5 STEEL PRODUCTION PROCESSES FOR THE TOP SIX PRODUCING COUNTRIES....31
2.5.1 Continuous Cast Steel Making Process ..................................................31 2.5.2 Steel Production in Electric Arc Furnaces .............................................33 2.5.3 Production of Steel in Oxygen Blown Converters ..................................35 2.5.4 Steel Production in Open Hearth Furnaces............................................36 2.5.5 Summary of Global Supply .....................................................................37
2.6 STEEL DEMAND ...............................................................................................37 2.6.1 World Apparent Crude Steel Consumption.............................................38 2.6.2 Per Capita Steel Demand - Six Leading Producer Countries ................40 2.6.3 Summary of Global Demand...................................................................41
2.7 EMPLOYMENT IN THE STEEL INDUSTRY ...........................................................42 2.8 DISCUSSION .....................................................................................................43 2.9 CONCLUSION....................................................................................................45
3 CHINESE IRON AND STEEL INDUSTRY–MARSHALL OF INDUSTRY 46
3.1 HISTORY OF CHINA’S IRON AND STEEL INDUSTRY...........................................47 3.2 PROFILE OF CHINA’S TOP 10 STEEL PRODUCERS...............................................65 3.3 CRUDE STEEL PRODUCTION BY STEEL MAKING PROCESS ...............................68 3.4 CONTINUOUSLY CAST STEEL DEVELOPMENT ..................................................70 3.5 STEEL PRODUCTION AND ECONOMIC GROWTH................................................71
3.6 PRODUCTIVITY AND ECONOMIC EFFICIENCY ...................................................85 3.6.1 Iron Ore Production – Principal Input Factor .......................................89 3.6.2 Energy Consumption - Input Factor 3 ....................................................91
3.7 TRADE DEVELOPMENT - STEEL AND IRON ORE ................................................97 3.8 CHINA’S IRON ORE DEMAND .........................................................................100
3.8.1 Elasticity of Demand for Steel and Iron Ore ........................................105 3.8.2 Intensity of Demand ..............................................................................107 3.8.3 Automobile Production and Steel Demand...........................................111 3.8.4 Shipbuilding and Steel Demand............................................................113
3.9 IRON ORE SUPPLY CHARACTERISTICS............................................................115 3.9.1 Iron Ore Supply Elasticity.....................................................................117
4 AUSTRALIA’S ROLE SUPPLYING CHINA’S STEEL INDUSTRY..........120
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4.1 AUSTRALIA’S ROLE IN SUPPORTING CHINA’S ECONOMIC DEVELOPMENT .....120 4.1.1 Trade between China and Australia .....................................................120
4.2 COMPARATIVE ADVANTAGE..........................................................................127 4.3 IRON ORE PRODUCTION .................................................................................129 4.4 IRON ORE EXPORTS ........................................................................................130
4.4.1 Outlook for Australia’s Iron Ore Production .......................................133 4.4.2 Pricing of Iron Ore - Setters or Takers.................................................134 4.4.3 Economics of Iron Ore Sea Borne Trade..............................................137 4.4.4 Outlook for Australian Iron Ore Trade.................................................140
5.1 CHINA’S INTERNATIONAL TRADE ..................................................................143 5.1.1 China’s approach to trade ....................................................................148
5.2 TRADE WITH JAPAN AND THE USA ................................................................150 5.3 CHINA’S FUTURE TRADE OUTLOOK - FACTORS INPUTS AND EFFICIENCY......152
5.3.1 How China develops trading strategy – Buying and Selling ................153 5.3.2 Olympics 2008 and Shanghai World Fair 2010 ...................................154 5.3.3 Infrastructure development ...................................................................155
5.4 FREE TRADE AND TARIFFS .............................................................................157 5.5 WORLD TRADE ORGANISATION (WTO) ENTRY.............................................165 5.6 FOREIGN TRADE POLICY................................................................................170
5.6.1 Foreign Investment in China.................................................................171 5.7 FUTURE OF CHINA’S STEEL INDUSTRY...........................................................180
5.7.1 Outlook for steel production .................................................................181 5.7.2 Research, Development and Sustainability...........................................184 5.7.3 Environmental Issues ............................................................................187 5.7.4 China’s Economic Development ...........................................................188
6.1.1 Key Research Findings .........................................................................210
7 RECOMMENDATION AND CONCLUSION ................................................238
7.1 SUMMARY OF FINDINGS .................................................................................239 7.2 RECOMMENDATIONS......................................................................................242
7.2.1 China.....................................................................................................242 7.2.2 Australia................................................................................................243 7.2.3 Other Countries.....................................................................................244
7.3 FURTHER RESEARCH......................................................................................244 7.4 CONCLUSION..................................................................................................245
9.1 GLOBAL IRON & STEEL INDUSTRY DATA ......................................................275 9.1.1 China Steel Balance ..............................................................................275 9.1.2 Japan Steel Balance ..............................................................................276
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9.1.3 Global Steel Production, 1900-2002 ....................................................277 9.1.4 Summary-Crude Steel Production ........................................................278 9.1.5 China Steel Growth Predictions ...........................................................279 9.1.6 Summary-Continuously Cast Steel Production.....................................280 9.1.7 Summary-Production of Steel in Oxygen Blown Converters ................281 9.1.8 Summary-Production of Steel in Electric Arc Furnaces.......................282 9.1.9 Summary-Production of Steel in Open Hearth Furnaces .....................283 9.1.10 Summary-Apparent Crude Steel Consumption .....................................284 9.1.11 Summary-Apparent Crude Steel Consumption per Capita ...................285 9.1.12 Productivity of Top 6 Crude Steel Producers .......................................286 9.1.13 Ranking of Steel Producing Countries, 1993-2002 ..............................287 9.1.14 Top 50 Steel Producing Companies, 1999-2002 ..................................289
9.2 CHINA AND GLOBAL IRON ORE DATA ...........................................................291 9.2.1 World and China’s Historical Iron Ore Production.............................291 9.2.2 Australian Historical Iron Ore Production, 1950-2002 .......................292 9.2.3 Australian Exports of Iron Ore, 2000-2002..........................................293 9.2.4 China Iron Ore Imports and GDP, 1981-2002.....................................294 9.2.5 Iron Ore Fines Pricing into Asia, 1973-2002 .......................................295 9.2.6 Composition of Iron Ore Imports to China, 1975-2002 .......................296 9.2.7 Composition of Australian Iron Ore Exports, 1975-2002 ....................297
9.3 KEY PHASES OF CHINA’S REFORM..................................................................298 9.4 CHINA STEEL INDUSTRY ................................................................................299
9.4.1 Steel products supply in 2002 with forecast for 2003...........................299 9.4.2 China's output of major steel products, 2002 .......................................299 9.4.3 Import and export of major steel products, 2002..................................300 9.4.4 Output of Non Ferrous metals, 2002 ....................................................301 9.4.5 Import and Export of Major Metals, 2002............................................302 9.4.6 Import Value of Major Commodities, 2002 ..........................................303 9.4.7 China’s Import Volume of Major Commodities, 2002..........................303 9.4.8 Automobile Makes, Output and Sales in China, 2002 ..........................304 9.4.9 Automobile Output by Region, 2002 .....................................................305
9.5 SELECTED CHINA ECONOMIC INDICATORS.....................................................306 9.5.1 Economic Data Base.............................................................................306 9.5.2 China’s GDP, Trade and Output, 1981-2002.......................................307 9.5.3 China’s Money Supply, 1981-2002.......................................................308 9.5.4 Debt Level Comparisons, 1981-2002....................................................309 9.5.5 Intensity of Steel Demand, 1952-2002 ..................................................310 9.5.6 China’s Trade with Australia, 1982-2002 ............................................311 9.5.7 Industrial Added Value by China’s Regions, 2002 ...............................312
9.6 CHINA MAP - STEEL AND IRON ORE REGIONS................................................313 9.7 AUSTRALIA – CHINA SHIPPING MAP ..............................................................314 9.8 DEVELOPMENTS IN CHINA’S IRON & STEEL INDUSTRY..................................315 9.9 EXTRACT FROM ZHU RONGJI’S GOVERNMENT WORK REPORT ......................316 9.10 COMPOSITION OF CHINA'S EXPORTS TO USA, 2002.......................................317 9.11 COMPOSITION OF CHINA'S IMPORT FROM USA, 2002 ....................................318 9.12 STEEL FOR THE BEIJING OLYMPICS ................................................................319 9.13 FIXED ASSET INVESTMENT IN CHINA 2002 ....................................................320 9.14 AUSTRALIA CHINA TRADE.............................................................................321
9.14.1 Summary of Australian Trade with Top 5 Countries, 2000-2002.........321 9.14.2 Australian Merchandise Trade by Country, 2000-2002 .......................322
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9.14.3 Australia’s Top Trades with China, 1996-2002....................................323 9.14.4 Australia – China Trade breakdown, 2002...........................................324
9.15 CHINA’S TOP ELEVEN IMPORT COMMODITIES, 2000 AND 2001 .....................325 9.16 MAP SHOWING AUSTRALIA’S IRON ORE MINES ............................................326 9.17 STEEL TARIFF CHANGES FOLLOWING WTO MEMBERSHIP ............................327 9.18 CHINA STEEL COMPANIES DATA BASE ...........................................................341 9.19 STATE COUNCIL .............................................................................................346
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Acknowledgements
I extend my gratitude to Murdoch University which provided financial and professional
support for this research programme and also supported me in presenting papers at
international conferences.
I also extend my thanks to my employer BHP Billiton Marketing Asia Pte Ltd, Minister
Song Ruixiang, Head of China’s Seismological Bureau, Professor Herb Thompson who
had the task of helping me develop my initial research programme and Dr Frank
Harman who subsequently edited my initial drafts.
A special thanks is given to Dr Dora Marinova who had the task of supervising me
during the latter and most demanding part of my research. Her experience and wisdom
were very helpful in enabling me to put my research thesis into its final form.
I specially acknowledge the excellent publications issued by the China Economic
Information Service (a Xinhua news agency publication), the Asian Development Bank,
the International Iron and Steel Institute, the World Trade Organisation, CRU
International (which publishes a wide range of journals on the metals industry). Each
one of these organisations produces many useful publications and information, which
was helpful to me during my research.
Last and not least is to thank my dear wife, Dr Gaomai Trench, who endlessly provided
moral support during many intense study periods both overseas and in
Australia. She is my inspiration.
1
1 Introduction
From the age of 12 and as a young martial arts enthusiast, I had an intense interest in
Asian culture. Then as a young professional engineer, I witnessed the emergence of
Asian industry at the expense of western industry. Japan emerged as the world’s
leading steel making country. It seemed that no country could possibly compete with
such a culture and strengthening economy. It was not until I became involved in the
iron and steel industry in the early 80s, that my interest started to focus on China. By
the early 90s, I could see an eclipse of Japan’s unbeatable rising sun was occurring.
China through its market and social reform programmes was emerging on the horizon
and was soon to become the leading steel making country.
China had indeed begun its journey in becoming a significant trading nation. Industrial
output was increasing, infrastructure was being improved, steel demand was increasing
and most importantly the iron and steel industry was modernising and growing. In
1996, crude steel production from China overtook Japan’s iron and steel industry (101.2
cf 98.8 million tonnes) and has continued to do so. It seems that China’s miraculous
development is now unbeatable. At the same time, and resulting from China’s reliance
on imports of raw materials, Australia was playing an ever-increasing role in China’s
economic development and China had become one of its leading trading partners. How
such a transformation could occur intrigued many. Working in the Australian iron ore
industry highlighted that China’s iron and steel industry had an important role to play in
China’s economic development, but this was not enough to enable an understanding of
what was really behind such development, its drivers and where it would lead to. It was
not until after studying Chinese language, culture and history followed by a Masters
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programme in Mineral Economics that I started to take great interest in not only the
significant role that the iron and steel industry had played in China’s economic
development, but also in the role that history and culture played in this development.
With a view to understanding and subsequently documenting the model behind China’s
success, this research programme was undertaken.
In Chinese culture, historical events are to be understood as determinants for the future.
The view of the importance of nationally developing the iron and steel industry can be
traced back to Dr Sun Yat Sen and subsequently maintained by Mao Zedong even
though his Great Leap Forward campaign was a complete failure. In the last quarter of
the 20th century, China started to achieve enormous success in its efforts to modernise
its industrial capability. Towards the end of the century, the centralised planning
system was replaced by a transitional and now market economy. By exploring the
development of China’s economy and by examining historical and cultural
characteristics behind that development, this thesis will attempt to give answers to the
main research question which is: What role did the Chinese iron and steel industry play
in the economic development of China? In order to answer it, the following sub-
questions are addressed:
• Did the industry support the building of a more prosperous society or did people
have to pay for wrong decisions?
• Can the industry sustain China’s economic development?
• Being a major supplier of raw materials (iron ore in particular), what role has
Australia played and will continue to play in supporting China’s development?
• What are the lessons for the future or for any other countries?
3
1.1 The Objective of this Thesis
The specific aims of the study are to:
• Analyse trends in the development of the Chinese iron and steel industry
including Australia’s contribution
• Examine previous literature analysing this development
• Draw an understanding of the development model
• Identify weaknesses in the model
• Make recommendations.
To do this, the research explores, examines and documents the characteristics behind a
long-standing view held in China that steel industry development and subsequent
industrialisation of the country would be a successful model for the economic
modernisation of China and that it would also lead to achieving the status of being a
modern world power. At the same time, the thesis outlines China’s iron and steel
industry development relative to the global iron and steel industry and the role that
Australia plays in supplying the principal raw material input, iron ore, to China.
The research also exposes weaknesses in China’s modernisation model based on the
expansion of the steel industry and industrial reform. Examples of these are social
pressures arising from higher unemployment and increasing financial instability seen
from the high level of non-performing loans that exist particularly in state owned
enterprises that have undergone significant reform. Whether growth in steelmaking
capacity can be sustained after domestic consumption demand cools off is examined.
The importance of China’s currency for the steel industry and continued economic
development is also considered.
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1.2 Academic Review
Extensive studies have been published about China’s economy, but not so much work
undertaken in relation to the Chinese Steel Industry and its role as a model in
developing the Chinese economy. Jefferson (1990) examined sources of enterprise
efficiency and productivity growth in China’s steel industry. His work showed that
during the years following the Great Leap Forward, productivity performance was poor
but improved significantly as a result of the reforms that took place in the 1980s.
Following Feng’s (1994a) study on restructuring of the international steel industry and
changing comparative advantage and Labson et al’s (1995) publication on China’s
emerging steel industry and its impact on world iron ore and steel market, much of the
academic China steel industry research has been undertaken by Yanrui Wu. His work
includes a 2000 paper outlining recent developments and prospects for the Chinese steel
industry (Wu 2000) and a 1998 study on the economics of the East Asia steel industries
in which a chapter was dedicated to China’s iron and steel industry (Wu 1998). In other
work on the productive efficiency and performance in Chinese enterprises, he illustrates
that China’s iron and steel industry is only achieving around 60% of its potential output
and that this is typical of a developing economy (Wu 1995 and 1996).
Tcha and Wright (1999) present results of analysis of their model for determining
China’s demand for importing Australian iron ore. Crompton and Wu (2000) further
examine features of Chinese steel consumption demand. Greig’s (1997) discussion
paper on emerging trends, issues and policies in metals markets and East Asia is a
convenient collection of several University of Western Australia’s discussion papers in
which Wu also provides input. In relation to China’s iron and steel industry, the paper
covers supply and demand characteristics. It also briefly looks at Western Australia as
5
a supply source of iron ore. Extending to Wu’s work is Xiao-Guang Zhang & Siqi
Zhang (2001) who further discuss technical efficiency in China’s iron and steel
industry.
With regards to reform and economic growth, Wu and Ye (1998) as editors present a
selection of papers that were given at the International Conference on the Economies of
Greater China, held at the University of Western Australia in 1997. The papers include
macroeconomic policy and reforms; trade reform and economic growth and regional
development. Bell et al (1993) in their book on China’s market reforms outline
developments since China’s 1949 revolution - embarking on a strategy of socialist
economic development based on self reliance, central planning and directed allocation
of resources. They illustrate by the 1970s the economy through trade and investment
was opened up, but still contained a large proportion of public ownership. The authors
show how China’s reform was unlike other centrally planned economies of Eastern
Europe in that the process was gradual and not “big bang”. A summary of the reform
phases is outlined in Appendix 9.3.
The World Bank has produced many papers on China. Two such papers on China’s
comparative advantage (Yeats 1991) and foreign trade reform (World Bank 1994) were
found particularly useful. In the comparative advantage paper, tables on comparative
advantage indices are compared with Japan and other Asian countries between 1970 and
1987. It concludes that China’s main advantage is with its huge pool of low cost labour
resources and that the country has large potential in expanding its international trade as
it builds on this advantage. In the China foreign trade reform paper, a detailed overview
of China’s reform process is outlined. It is interesting to note that with regards to
6
inefficiency in the country’s steel industry due to fragmentation of production facilities,
in 1989 it was estimated that as much as 95% of enterprises were operating below
optimum.
Feng (1994b) in his article on China’s steel industry suggests that a clear trend in
developing economies attracting steel industry at the expense of industrialised countries
exists. He outlines this is attributed to increased national demand in developing
economies which in turn facilitates supply side capital stocks and economic reforms.
This then promotes technical efficiency and resource allocation improvements.
For understanding the history that shaped the Chinese psychology and attitude that
enabled economic reforms to be effective, cultural literature works were found very
useful. Wagner’s (1997) study of the traditional Chinese iron industry and how it
changed was useful from a historical perspective of the country’s steel industry
development.
Most of the iron and steel statistical data came from Chinese Government Departments
(their publications, internet websites and people) and the International Iron & Steel
Institute (their publications and internet website)1. Economic data were collected from
the Asian Development Bank (their internet website and publications). Much of the
current financial and economic news was obtained from the Asian media during regular
searches. The China Economic Information Service (CEIS) was monitored over several
years and was found to be one of the best sources of information on China’s steel
industry, mineral resources activity and general economic news.
1 Also documents searched for and found hidden away in old library files-discarded as being too old.
7
In relation to the actual role played by China’s steel industry on the country’s economic
development, apart from in depth academic analysis of aspects, which generally related
to efficiency, it was found that much of the published work available tended to be rather
old and did not articulate or examine the history behind the role played by the industry
in China’s economic development and its industrialisation programme. This research
was needed to bring together the history behind the development of an industry that was
intended to be the country’s major driver towards industrialisation and how it compared
with the global industry. This being particularly significant since during a large
proportion of China’s period of rapid economic development, the global iron and steel
industry suffered from overcapacity and inefficiency.
Very little academic work has been done that takes a forward looking perspective in
examining how such an industry being a key driver of Chinese economic development
will develop. As conditions change in China, weaknesses in a model based on
industrialisation are sure to emerge. In order that both China and those engaging in
trade with the country better understand risks, it is useful to openly discuss these
weaknesses. It is considered necessary in a study researching the role played by a major
industry sector, to examine whether the viability of the industry can be sustained as the
country develops and its exposure to strategic issues increases.
8
1.3 Research Methodology
The research was conducted over several years in Australia, China and Singapore. It
consisted of reviewing Asian media, literature and databases held by international
organisations like the International Iron & Steel Institute, the Asian Development Bank,
the World Bank, the International Monetary Fund and Chinese Government
Departments. Several research visits were made to China where discussions were held
with Chinese Government Departments and Universities in both Beijing and Tianjin. A
trip was also made to the United Kingdom (a country that formerly had a strong iron
and steel industry). Support for the research was initially given by Rio Tinto Pty
Limited and subsequently by BHP Billiton Pty Ltd, two of the world’s largest mineral
resources companies and leading iron ore producers and suppliers to the Chinese steel
industry.
Several presentations and papers on this research were given. The most significant
were at the 2001 Global Iron Ore Conference in London, the 2002 Global Iron Ore &
Steel Forecast Conference in Australia and at a 2002 Hi-Tech trade presentation in
Tianjin, China. Participation in these events helped develop important contacts in
China which were helpful in providing further insight into the key features of steel
industry development that helped transform China’s economy and restore national
pride.
Economic and steel industry data were collected and stored in databases much of which
has been shown in the Appendices. The research focuses on China’s economic
development and examines the following hypothesis in relation to that development:
9
From a long-standing national development perspective, a firmly based indigenous
steel industry not relying on imported steel provides a secure base for modernisation
and economic development through industrialisation and international trade.
This research tests this hypothesis by examining in detail the following:
• In view of the importance of culture and history behind the drive towards
modernisation and industrialisation, Chinese literature going back to Sun Yat
Sen (1866-1925) - who led the first Chinese Republic in 1911
• An analysis of the failure of the Great Leap Forward campaign which started in
the early part of 1958, officially ended in December 1958, but many of the
programmes still continued through to 1963 (the end of the second five year
planning period in which the campaign was to modernise China’s economy)
• The details of the modernisation programme during and post Mao Zedong – this
covers his first Five-Year Plan (1953-1957) and subsequent plans. Post Mao
reforms started with Deng Xiaoping just prior to Mao Zedong’s death in 1976
• An outline of the growth of the Chinese steel industry (relative to the global
industry) from the middle of the 20th century
• How the iron and steel industry contributed to enhancing other industries
through increasing the production of exports and also reducing reliance on
imports
• The most important input raw material required for the production of iron and
steel is iron ore. This is a resource that China lacks; so having access to a
reliable source of this principal input is essential for sustaining the industry.
Australia is a key source for this raw material, and therefore Australia’s
10
contribution to China’s iron and steel industry as a supplier of raw materials is
examined
• Structural weaknesses, that may just be a part of the economic cycle, that
threaten the ability of the iron and steel industry to continue developing and
which in turn could lead to the industry being a drain on the economy.
1.4 Overview of Chapters
Before one can quantify the role China’s iron and steel industry has had on the
development of the country’s economy, it is necessary to understand the relative
position within the global iron and steel industry. This thesis starts with an in depth
look at the global iron and steel industry in Chapter 2. This is to provide an
understanding of the industry and enable one to better quantify and put into context the
importance of the steel industry as a key economic driver. In order to subsequently be
able to quantify the relative magnitude of China’s iron and steel industry development
and its corresponding rankings, global historical industry production data up to the end
of 2002 are presented along with selected detailed industry data and trends for the
world’s leading steel producing countries.
Chapter 3 follows with a historical review and detailed examination of the Chinese iron
and steel industry. This outlines the significant milestones in China’s history that had a
bearing on the philosophy behind developing an iron and steel industry to be a key
factor in rebuilding the country and driving the economy. Reforms in both political
ideology and economic management that put in place the appropriate framework for
iron and steel production are discussed in detail. The significant developments since the
birth of the People’s Republic in 1949 are highlighted along with changes in the
11
industry’s characteristics which are shown and discussed along with economic data and
trends. The country’s comparative advantage in a range of steel production processes
along with improvements in economic efficiency in relation to factors of production and
resource allocation are considered. These demonstrate and quantify the nature and
importance of the role played by the industry on the country’s economic development
and modernisation at the same time providing a detailed assessment of China’s iron and
steel industry in relation to the global iron and steel industry.
Chapter 4 presents an outline of Australia’s role in supporting China’s iron and steel
industry and the country’s economic development. Australia’s endowment of iron ore
reserves gives it a comparative advantage and this makes it the source of choice for
China and has elevated Australia to being China’s principle supplier of iron ore. Iron
ore production and supply economics are examined and discussed. The potential for
future trade developments between Australia and China is also assessed.
Chapter 5 outlines China’s economic development and its approach to international
trade. As the relationship between the nation’s steel industry and economy develops,
the appeal of international trade and foreign investment, which were found to be
increasing, is looked at with a view to impact on iron and steel demand and the nature
of its trade. The effects of China being a member of the World Trade Organisation, the
Beijing Olympics 2008, Shanghai World Expo and further trade reform together with
changing approaches to trade are discussed. The research discovered mid to longer-
term inherent risks and exposures for both China and international suppliers or
investors. With this in mind, steel industry, trade development and structural
weaknesses associated with exchange rate policy, integrity of the financial system in
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relation to debt and reform generated unemployment giving rise to social tensions are
highlighted.
Chapter 6 outlines and discusses the findings of this research project and assesses
whether the decision to build an iron and steel industry, which supported
industrialisation as a basis for modernisation and economic development, was a good
choice. The work looks at the results of increased exposure to international markets and
resulting trade, whether they have improved the living standards of the Chinese,
whether the steel industry will continue to play as significant role in the future as the
economy develops and how the nature of demand, factors of production and
comparative advantage may change.
Chapter 7 summarises the findings and key issues that are relevant to China,
Australia and other countries. Conclusions, recommendations and further research
directions are also presented.
13
2 Overview of the Global Iron and Steel Industry
To help understand China’s relative ranking and position in the global iron and steel
industry both now and in the past, this Chapter presents an overview of the industry. It
gives an outline of the key elements and measurements that enable assessment of the
steel industry’s economic contribution.
Throughout this and following chapters, a great deal of reference is made to crude steel
making, manufacturing processes and product types. To help understand the
terminology and measures that are referred to in this thesis, the diagram on Figure 2.1
has been developed. It presents the key elements of total crude steel production. A
breakdown of the key elements of the crude steel making processes is shown in brown
and the key elements of steel product processes are shown in blue.
Figure 2.1: Crude Steel Production Breakdown
Abvn: HR: Hot rolled Coil (steel strip); CR: Cold Rolled Coil; HDG: Hot Dipped Galvanised
Stock
Rebar Merchant Bar Sections
WireRod
Billets & Blooms Slabs
Longs Sheet/Flat
Plate
HR Coil
HDG
CR Coil
Total Crude Steel Production
Oxy Blown Converter Electric Arc Furnace Other
Steel Products
Crude Steel Ingots Continuously Cast Steel Liquid Steel for casting
Open Hearth Furnace
Scrap
Tubes & Fittings Other Products
Rail Track Scrap
Abvn: HR: Hot rolled Coil (steel strip); CR: Cold Rolled Coil; HDG: Hot Dipped Galvanised
Stock
Rebar Merchant Bar Sections
WireRod
Billets & Blooms Slabs
Longs Sheet/Flat
Plate
HR Coil
HDG
CR Coil
Total Crude Steel Production
Oxy Blown Converter Electric Arc Furnace Other
Steel Products
Crude Steel Ingots Continuously Cast Steel Liquid Steel for casting
Open Hearth Furnace
Scrap
Tubes & Fittings Other Products
Rail Track Scrap
14
2.1 Steel Industry - Driver of the Economy
A key principle in growth theory is the important roles played by industry and
manufacturing in that they are considered as being “Engines of Growth” (Kaldor 1996
cited in Bramall 2000). The global steel industry developed from the heavily
industrialised Europe and USA. These regions had industries in place prior to the
Second World War between 1939 and 1945. It was not until after the war that
production capacity started to rapidly increase (refer to Chart 2.1). However, during the
latter half of the 20th century, developments in other manufacturing sectors introduced
substitutes (for example, plastics and aluminium) and these have contributed to lower
demand and lessened the steel industry’s dominance in the global economy. The
industry has been faced with oversupply problems for most of the second half of the
20th century. Threats to oil supplies and environmental concerns also contributed to
many western countries reducing investment in the industry.
However, steel is a material that is difficult to do without and less developed countries
demand more as they embark on development programmes as occurred in the last
quarter of the 20th century when Asian countries increased their appetite for steel. So as
western countries downgraded supply side economics, Asian economies (first Japan,
then Korea and China) with their lower input factor costs, moved in and captured steel
production market share. This was done during periods of significant economic
development for these countries that in effect used the steel industry as a model to
utilise resources, reduce reliance on imports and at the same time increase their
15
industrial base and capability. Correspondingly, this growth has been positively
reflected in GDP statistics.2
The iron and steel industry is very resource hungry and factors of production
incorporate a large proportion of a country’s energy, minerals and labour. In relation to
economic significance, the World Trade Organisation (2002) reports that global trade in
the iron and steel industry in 2001 was US$130 billion. Allowing for related industries
Marsh (2003a, p.i) considers the iron and steel industry to be worth over US$300 billion
annually to the global economy.
Chart 2.1 shows world steel production which following World War 2 was driven by
large demand growth in the industrialised countries and regions of Europe and North
America. The most rapid growth phase was from the late 1940s through late 1970s
when production increased from 111.6 million tonnes in 1946 to 746.4 million tonnes in
1979. From this time, as traditional industrial nations like USA and the European
countries reduced demand growth, Asian economies started their development, which
maintained increased demand.
2 Both Japan and Korea subsequently had economic issues that arose from weaknesses in their economic structures.
16
Chart 2.1: World Steel Production, 1900-2002
Data sources: From 1990 to 2001(inclusive) - Steel Statistical Yearbooks
For 2002 - CRU Monitor Bulk Ferroalloys (March 2003)
The major challenges affecting the industry are slowing down of world economic
growth, excess steelmaking capacity, input factor logistics/economics, oil price and US
dollar value. The slow down in world economic growth at a time when many countries
added to their steel production capacity has contributed to global excess steelmaking
capacity. This excess capacity is causing older, less efficient plants (like many in the
USA) to close, this in turn is causing domestic political pressures in the USA to impose
punitive tariffs and impact world trade and prices. The oil price has a significant impact
on regional economies in that as it increases, demand and economic growth suffer. In
addition, as factor input prices increase, steel production costs increase, which lower
profit margins for the industry. These lower margins cannot be recovered in the market
place due to the excess supply of steel causing product prices to remain low. Oil
markets have been very volatile in recent years as a result of regional insecurity and
threats of terrorism. Most countries trade in US dollars, so as the dollar weakens, to
maintain local costs, sellers tend to increase prices. During 2002 and 2003, the US
0
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Wor
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2002
17
dollar has depreciated by over 20% against several currencies. It appears unlikely in the
short term that the US dollar will recover to its pre 2002 high values. The producers
who can best manage the above challenges will be the ones that will better survive in a
tough global marketplace.
To show the world steel production, Chart 2.2 shows the regional comparisons since
1989. Regional groupings are: Europe (all of Europe); former USSR3; North America
(Canada, USA, Mexico, Trinidad & Tobago, Cuba, Dominican Republic, Guatemala
and El Salvador); South America (Argentina, Brazil, Chile, Colombia, Ecuador,
Paraguay, Peru, Uruguay and Venezuela); Africa and Middle East; China; Japan; South
Korea and other Asian countries plus Oceania (Australia and New Zealand).
Chart 2.2: Regional World Steel Production, 1989 – 2002
Data source: International Iron and Steel Institute
From Chart 2.2, the reducing trend in steel production in the former USSR can be seen.
Notwithstanding industry restructuring which involved closing many inefficient plants,
North America still maintained a modest increase in production output. This results
from continued investment in modern steel making processes such as the lower capital-
intensive electric arc process. China’s production output grew steadily from 1989
through to 2000 from 61.59 to 127.24 million tonnes, an average annual increase of 6
million tonnes. From 2000 to the end of 2002, production output increased from 127.24
to 181.56 million tonnes, an increase of 42.7%. Since 1989, China has had the highest
growth in steel production in the world. Japan (formerly the world’s largest
steelmaking country up until1996), produced 107.91 million tonnes of steel in 1989 and
in 2002 produced 107.75 million tonnes. Its output has remained reasonably constant.
This is mainly due to the higher technical quality steels being produced there. These
groupings are shown in Chart 2.3 for 2000, 2001 and 2002.
From Chart 2.3, it can be seen that global crude steel production did not change much
from 2000 to 2001 then increased moderately in 2002. In comparison, China’s crude
steel production increased from 127.2 million tonnes in 2000 to 152.3 million tonnes in
2001 and then to 181.6 million tonnes in 2002. This represents 15%, 17.9% and 20.5%
of the world’s total production respectively. Europe has remained steady at around 206
million tonnes. China (the world’s largest steel making country) is catching up with
181.6 million tonnes and has the potential to exceed the steel production of all of
Europe within the next few years. Particularly, with oversupply resulting from excess
capacity in both Europe and North America, these regions are under pressure to
rationalise their industries by closing down older plants and ones with lower efficiency4
(in the mid to longer term, this will lead to considerably less supply in these regions).
3 Former USSR consists of: Russia, Ukraine, Kazakhstan, Byelorussia, Moldova, Latvia, Uzbekistan, Azerbaijan, Georgia, Estonia, Latvia and Lithuania.
19
China has undoubtedly become one of the top steel producers in the world. Details of
world production (supply) and world steel consumption (demand) of crude steel are
shown in Appendices 9.1.3 and 9.1.10 respectively.
4 China has been selectively purchasing redundant plant mainly from Germany and has then with the help of German expertise used this plant in expansions and upgrades to some of the older Chinese plants.
20
Chart 2.3: Regional World Steel Production 2000, 2001 & 2002
Data source: International Iron and Steel Institute (all units in million tonnes)
World steel (2000)Total 847 million tonnes
62.943.1
106.4
127.2
24.639.1 135.2
98.6
209.8
15%15%
World steel (2001)Total 849 million tonnes
204.6
100.1
119.737.4
26.8152.3
102.9
43.962.1
Europe
Former USSR
North America
South America
Africa & Middle East
China
Japan
South Korea
Other Asia & Oceania
17.9%17.9%
World steel (2002)Total 887 million tonnes
55.245.4
107.7
181.6
26.6 40.8123.9
99.9
205.6
20.5%20.5%
21
2.2 Industry Structure and Behaviour - Barriers to Entry
The iron and steel industry is very capital intensive, requires long factory construction
and upgrade times and access to low cost factor inputs (iron ore, energy and labour).
These features make it difficult for new companies to enter the industry and in effect are
natural barriers of entry. In addition, returns on investment have traditionally been low,
which also does not encourage new entrants. Many of the Chinese producers initially
had their factories close to iron ore and coal mines (to lower the major factor input
costs), but many also found that the quality of their iron ore was too low (30-35% iron
content compared with Australia at 60-63%) and environmental problems arose from
coal burning.
Due to the high costs and low returns, many of the traditional steel making factories in
the USA closed (Marsh 2003a). The United Kingdom was one of the first industrialised
nations to see its steel industry being cut back. In the 1970s, crude steel production in
the United Kingdom was 28 million tonnes (IISI 1974, p.5) compared to 2002 when
production was only 11.6 million tonnes (IISI 2002a). Closing down and rehabilitation
costs also tend to encourage older less efficient plants5 to continue production beyond
their economic lives, this adds to the oversupply situation of steel products, which
continues to maintain downward pressure on steel prices.
In 2002, the top 5 world’s leading steel countries (China, Japan, USA, Russia and South
Korea) produced 54.8% of the world’s steel output, and then when one examines the top
5 of the world’s steel makers (Arcelor, LNM Group, Nippon Steel, Posco and Baosteel),
one sees that they only produce 17.6% of total world output. This is less industry
22
concentration compared to other industries like cement, aluminium and copper where it
is more than 40% (Marsh 2003a, p2). The steel production figures show that the
potential for further consolidation in the industry is likely and necessary. Further
examination of the iron ore industry (being the principal raw material input) showed
that predominantly 3 large companies control the majority of global production
(Australia’s Rio Tinto and BHP Billiton and Brazil’s CVRD).
To restore some measure of profitability to the industry and ensure that it can be
sustained in the longer term, pressure for more consolidation through mergers and
acquisitions is mounting (Alden & Marsh 2002, p3). This is an attempt by the major
players to increase industry concentration, which will in turn tilt playing fields and
enable higher market prices. As suggested above, this trend in industry concentration is
likely to increase barriers to entry, but will also increase a move towards monopolistic
behaviour, which together with high barriers to entry will increase the returns on capital
being achieved. In addition to high capital investment costs, other factor of production
characteristics impact entrants’ willingness to enter the industry. Examples of these
follow.
2.3 Economics of the Steel Industry - Factors of Production
To understand how China has emerged from being an insignificant player in the global
steel industry to being the world’s largest producer, it is useful to consider economic
aspects of the steel industry. These relate to the principal factors of production: energy,
raw materials (iron ore being the principal input), technology, vintage of plant, location
of labour and comparative advantage.
5 Environmental impact, energy efficiency and costs per tonne are key measures impacting plant efficiency.
23
A major factor of production is operating costs. These costs consist of feedstock raw
materials (iron ore, coking coal, magnesium, nickel and other minor additives), energy,
labour, services, and interest charges. With China starting steel industry development
in its communist era of the 1950s, these production costs had been artificially low and
centrally planned economies have shown that factors of production were not efficiently
allocated. This will be discussed in more detail in Chapter 3.
Steel industry start up costs are high due to the capital required for the high costs of the
steel making plant. However, with rationalisation in both the European and North
American steel industries underway, China has been able to purchase redundant steel
plant at low costs. For example in 1998, Thyssen Krupp Stahl (TKS) sold its 1.5
million tonne per year blast furnace from its Dortmund-Horde plant to China’s Handan
Iron and Steel Works (CRU 1998, Industry developments, p.3). Then in 2001, TKS
sold the Jiangsu Shagang Group most of the 4 million tonnes per year Dortmund steel
plant. When operational, this will increase Shagang’s total steel production capacity
from 4.5 to 8.5 million tonnes per year (CRU 2002a, Industry developments, p.10). In
2002, China’s Xiyang Group purchased two flat product mills, one from ISG’s
Cleveland West operations and the other from ISG’s Sparrow Point Mill. With the
collapse of Enron, the Chongqing Iron and Steel Company purchased a cold rolling mill
previously owned by them (CRU 2003a, Industry news in brief, p.10).
Due to the lower start up costs, many modern plants are being constructed as mini steel
mills. This type of plant uses the electric arc steel production process to produce long
products (refer to Figure 2.1 which shows the other two processes, oxygen blown
24
converter and open hearth furnace and also charts later in this chapter which show
increasing use of the lower capital cost electric arc production process). A typical
breakdown of costs associated with mini steel mills is shown in Table 2.1.
Table 2.1: Comparison of Average Mini Steel Plant (long products) Costs as at 2000
Country
(averages)
Feedstock Energy Refractories Fluxes &
Alloys
Direct
labour Electrodes Other
China 63% 18% 4% 5% 1% 3% 6%
Japan,
Korea,
Taiwan
56% 23% 5% 4% 3% 3% 6%
North
America 56% 17% 6% 5% 7% 4% 5%
Data source: AME Mineral Economics Steel, 2001, pp.26-33
The above table confirms that notwithstanding China’s comparative advantage of low
labour and energy costs, feedstock costs are higher. In this regard, it is worth taking a
detailed look at one of China’s steelworks, see Table 2.2. It shows costs in US$/tonne
against the world average costs for Shanghai No.5, long products mill in 2002.
25
Table 2.2: Comparison of Selected World Average Costs with Shanghai No.5 Long
Products Mill as at 2000
Costs (US$/tonne)
Average Feedstoc
k Energy
Direct
labour
Refractories, Fluxes,
Alloys,
Electrodes & Other
Shanghai No. 5
Long Products Mill
Year 2000
120.2 36.9 2.0 35.9
World average
(from samples) 97.3 31.5 6.8 35.9
Data source: AME Mineral Economics Steel, 2001, p.A-3
China’s main feedstock raw material is iron ore. As the country’s reserves of these are
of low quality, it is cost effective to use only part of the domestic production and import
the rest. Shanghai No 5’s feedstock cost of US$120.2 per tonne is 23.5% higher than
the world average of US$97.3 per tonne and energy costs of US$36.9 per tonne are
17.1% higher than the world average value of US$31.5 per tonne. This research
identified that China’s feedstock costs are increasing (mainly as a result of the country’s
own demand) and as the country relies on energy imports, it is likely that energy costs
will continue to be higher than world average. This shows that China’s low labour cost
is giving the country a competitive advantage. As the country’s economic development
continues, labour costs are likely to increase; this suggests that in the long run, China
could lose its international competitiveness. This situation will occur sooner if its
currency appreciates in value which will make imports cheaper and exports more
expensive.
26
As stated above, the principal feedstock raw material in the steel making process is iron
ore. Details of domestic reserves, production and imports are presented in Chapter 3.
This is an area where Australia with its abundant iron ore resources and a direct reduced
iron production facility will play a major role in China’s continued development of both
its iron and steel industry and its economy. Australia’s contribution is outlined in detail
in Chapter 4. Feedstock inputs (energy and iron ore) are major risk exposures that
China faces in maintaining the steel industry’s momentum in driving the economy.
With direct labour cost of US$2 per tonne, comparative advantage in low labour cost
inputs is evident from Table 2.2. This is confirmed by the World Bank’s research on
China’s comparative advantage, which concluded that China had developed
comparative advantage in a relatively broad base of labour intensive industries (Yeats
1991). China has a large supply of labour that is willing to work for low wages in
generally poor working environments. Factories take advantage of this and to some
extent exploit workers in that safety and health in the workplace is not high on their
agendas.
Location is an important factor contributing to production costs. China’s industrial
development has been helped by the development of large production facilities located
at coastal cities. Improved infrastructure has enabled improved transport efficiency of
the commodities for export and for those required for industrial inputs. Unfortunately,
in a country as large as China, this has given rise to large disparities in regional
development and efficiencies. So in the short term, this increases the efficiency of
production, but in the longer term, will introduce social problems as state workers are
27
laid off and locals cannot get work. This leads to an important finding and is discussed
in more detail in Chapter 5.
Important features of the productive efficiency of steel producing plants are age,
technical and commercial ability. Newer and higher technical level steel making
facilities require lower maintenance and operate using lower energy consumption.
Environmental pollution is also lower. How well the factories manage the supply -
demand balance, negotiate raw material supply contracts and markets their products
impacts input/output efficiency. In relation to sustainability, China has recently started
to pay more attention to improving environmental externalities. The China Economic
Information Service reported (CEIS 0401 2003, art.043) that Shougang steelworks will
reduce production capacity by 2 million tonnes by closing down one of their converters
to reduce pollution. A new production facility is being built in Hebei, closer to
Shougang’s mining operations. The plant is expected to be operational by mid 2004.
According to Zhu Jimin, Board Chairman of Shougang (CEIS 0128 2003, art.040) “no
out-of-date production techniques and equipment formerly used by Shougang would be
transferred to the new base. Instead new and environmentally friendly technology and
equipment would be installed to build a modern steel plant”. In the past few years,
Shougang is reported to have spent 241 million yuan (US$29 million) in financing 33
projects relating to environmental protection (CEIS 0117 2003). It is expected that
many other steel facilities will close down as the Central Government continues in its
endeavours to reduce pollution.
28
2.3.1 Iron Ore - Principal Input Material to the Steel Industry
Chart 2.4: World Production of Iron Ore, 1948 - 2002
Data sources: American Iron Ore Association (1996), International Iron and Steel Institute
AME Mineral Economics, January 2003 (for 2002 data only)
Iron ore is the principal raw material input required in the steel making process. In
many countries, the industry is considered a labour intensive factor input. In relation to
China, it is a resource that was traditionally sourced domestically, but now increasingly
relying on imports due to cost effectiveness of using higher quality material than what is
available domestically. The growth in world iron ore production since 1948 is shown in
Chart 2.4 and is directly related to steel production, which in turn is determined by
global demand for steel products. Within 50 years, we have seen production increase
from under 200 to just over 1,000 million tonnes (annual average 16 million tonnes).
Most of the growth occurred between 1950 and early 1970s – from just over 200 to
approx 900 million tonnes (annual average 35 million tonnes). Growth slowed after
mid 1970s, not starting its modest recovery (in relative terms) until early 1980s when
China’s demand increased. The Asian economic crisis in the early 1990s stalled the
growth rate for a few years.
0
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120019
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)
29
China has taken advantage of the key factors of production to develop its steel industry.
Iron ore and coal (coking and energy) have been relatively low cost; prices for these key
inputs are increasing as a result of the country’s high demand. The country is
maintaining its comparative advantage through its low cost labour. This is under threat
as labour costs increase with increasing economic development. Increasing demand and
in turn increased costs of steel will impact the country’s continued economic
development. This finding will be discussed in more detail in Chapter 6.
2.4 Leading Steel Producing Countries
Table 2.3 shows the top ten steel producing countries (ranked on 2002 output) and the
corresponding production output from 1998 to 2002.
Table 2.3 Steel Output of the Top Ten Producing Countries (million tonnes), 1998 - 2002
Countries 1998 1999 2000 2001 2002
China 114.1 123.3 126.3 150.9 181.6
Japan 93.5 94.2 106.4 102.9 107.7
USA 97.3 96.1 100.7 90.1 92.4
Russia 41.8 49.8 57.6 57.5 58.6
Korea 39.9 41.0 43.1 43.9 45.4
Germany 44.0 42.1 46.4 44.8 45.0
Ukraine 23.5 26.8 31.3 33.1 34.1
Brazil 25.8 25.0 27.8 26.8 29.6
India 23.5 24.3 26.9 27.3 28.8
Italy 25.8 25.0 26.5 26.5 26
Data sources: International Iron and Steel Institute, Iron & Steel Monthly report December
1999 for 1999 & 1998; Iron & Steel Monthly report December 2001 for 2000; Iron
& Steel Monthly report December 2002 for 2001 and 2002
30
Since 1998, not much change has occurred with the main exception being China
increasing production by the highest margin and Korea edging ahead of Germany in
2002. Rankings since 1991 are in Appendix 9.1.13.
Chart 2.5 shows the 6 leading steel producing countries since 1972. These are China,
Japan, Germany, USA, Russia and South Korea. The chart shows that only China and
Korea are experiencing growth, which is occurring at the expense of the others.
Between 1972 and 2002, China increased from 23.4 to 181.5 million tonnes, Korea
from 2 to 45.4 million tonnes and the USA, actually decreased from 120.9 to 92.4
million tonnes. This shows the shift in steel production from the west to Asia.
Although Japan is losing market share to China, it still is a significant producing
country.
Chart 2.5: Six Leading Producer Countries' Steel Production, 1972 - 2002
Data sources: International Iron and Steel Institute up to 2000 and Russia 2001
CRU Monitor Bulk Ferroalloys, March 2003, p.2 for 2001 and 2002
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
200,000
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
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1998
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2002
year
Maj
or P
rodu
cers
' Ste
el P
rodu
ctio
n S
ince
197
2(th
ousa
nd to
nnes
)
PR China USA
Japan Russia
Germany Korea
31
2.5 Steel Production Processes for the Top Six Producing Countries
A useful way to quantify a country’s efficiency and technical development is to
examine the change in steel production from the traditional steel making processes.
Figure 2.1 outlined the steel production processes and resulting products. The main
steel making processes are oxygen blown converter, electric arc furnace and the open-
hearth furnace. The final casting methods used can be very energy and labour intensive,
the most technically advanced approach is to use the continuous casting process. The
continuous casting process uses less energy (it processes the material directly before it
cools thus eliminating the need for additional heat energy). Many producers have been
upgrading plants to use this method.
Chart 2.6 shows the development in continuously cast steel for the 6 leading producer
countries. A higher level of usage of continuous casting is a key industry performance
measure. Charts 2.7, 2.8 and 2.9 illustrate the changes in the major crude steel
production processes (this is the stage before shaping the steel into billets, blooms or
slabs either by continuous casting or in separate stages) for the 6 leading producing
countries since 1972.
2.5.1 Continuous Cast Steel Making Process Chart 2.6 shows that between 1982 and 2002, China’s continuous cast steel production
has increased from just under 3 to 168 million tonnes; Korea from just over 6 to just
under 45 million tonnes. Between 1982 and 2002, the USA increased continuous cast
32
steel production from 19.6 to 89.5 million tonnes dropping to 87.3 million tonnes in
2001 as the industry faced overcapacity in steel production.
33
Chart 2.6: Six Leading Producer Countries' Continuously Cast Steel Production 1972 – 2002 Data source: International Iron and Steel Institute
The continuous casting process is increasingly being used along with electric arc
furnaces in steel minimills. These mills reduce the number of stages in the steelmaking
process and as a result are more efficient. They are increasingly being used in the USA
as shown by the increase in continuous casting processes in Chart 2.6.
2.5.2 Steel Production in Electric Arc Furnaces
Chart 2.7: Six Leading Producer Countries' Production of Crude Steel in Electric Arc
Furnaces, 1972-2002.
Source: International Iron and Steel Institute
0
20000
40000
60000
80000
100000
120000
140000
160000
180000
1972
1974
1976
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1982
1984
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1996
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Maj
or P
rodu
cer's
Con
tinuo
us S
teel
Pro
duct
ion
(tho
usan
d to
nnes
)
PR China USA Japan Russia Germany Korea
0
10,000
20,000
30,000
40,000
50,000
60,000
1972
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or P
rodu
ders
EA
F S
teel
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duct
ion
(thou
sand
tonn
es)
PR China USA
Japan Russia
Germany Korea
34
Data source: International Iron and Steel Institute
Since it was very effective at reducing the ingress of impurities into the steelmaking
process, the electric arc furnace was originally designed for making high grade alloy
steels. It was also found to be very effective at removing sulphur from the steelmaking
process when scrap was being used and for this reason, electric arc furnace steelmaking
plant became more attractive from an investment perspective in that lower capital is
required and the process is simpler. Chart 2.7 shows the growth in the electric arc
furnace process. Between 1972 and 2002, Japan’s growth has been from 18 to 28.2
million tonnes, the USA from 21.5 to 46.7 million tonnes and China from 5.2 to 29
million tonnes. Korea has quietly been increasing from 0 in 1974 to 20.5 million tonnes
in 2002. The electric arc furnace can use direct reduced iron (DRI) products and scrap
metal directly. This type of plant is very suitable for minimills where they are more
suited to rolled rather than flat products. It is however heavily reliant on the cost of
electrical power.
35
2.5.3 Production of Steel in Oxygen Blown Converters
Chart 2.8: Six Leading Producer Countries' Production of Crude Steel in Oxygen Blown
Converters, 1972 - 2002
Data source: International Iron and Steel Institute
Chart 2.8 shows the production of steel in oxygen blown converters. Oxygen blown
converters include blast furnace steel making processes which have a jet of pure oxygen
injected onto the surface of the molten iron. These furnaces prefer lump product or
agglomerated (sinter) products being fed into the furnace. Unfortunately, they have
high initial capital outlays. The chart shows that only China and Korea invested in
growth of the use of oxygen blown converters. The USA closed down plants of this
type in the early 1980s in an effort to reduce the country’s oversupply capacity while
endeavouring to increase its more cost effective electric arc furnace steel producing
plant together with continuous casting processes in minimills.
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
Maj
or P
rodu
cers
BO
F S
teel
Pro
duct
ion
. (t
hous
and
tonn
es)
PR China USA
Japan Russia
Germany Korea
36
2.5.4 Steel Production in Open Hearth Furnaces Chart 2.9 shows the traditional inefficient open-hearth furnace. The open-hearth
furnace is the oldest method and was primarily used in the early days of steel making.
As can be seen, its use is diminishing as older plants are closed down.
Chart 2.9: Six Leading Producer Countries' Production of Crude Steel in Open Hearth
Furnaces, 1972 – 2002.
Data source: International Iron and Steel Institute
Following the forming of the People’s Republic, the open-hearth furnace was China’s
principal steel making process. It continued growing until the mid 1990s when as part
of the country’s steel industry reform, the central government closed many steel
producing plants that used this type of equipment. The chart shows that long before
China’s reform, other leading countries such as Japan, Germany and USA had been
moving away from the open-hearth steel making process replacing it with more efficient
alternatives.
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
Ste
el P
rodu
ctio
n in
Ope
n H
earth
Fur
nace
s (th
ousa
nd to
nnes
)
PR China USA
Japan Russia
Germany Korea
37
2.5.5 Summary of Global Supply
Regionally, notwithstanding a potential increase in Russian crude steel production, the
trend for the European steel production is moderately downwards, this being somewhat
dependent on German industry consolidation. Asia’s competitive advantage through
factor of production inputs of lower labour costs and plant locations (principally
supplying domestic markets) should result in Asia’s upward trend continuing. This
upward trend will be underpinned and sustained by China, Korea and India’s supply
growth. North America’s long-term trend is upwards. This has the potential to
significantly level off and may even trend downwards as older plants (which are
continuing beyond their economic lives) close down and the industry continues to both
restructure and consolidate. However, it is not all negative, as the North American steel
industry consolidates and increases its use of higher level of technical processes, its
operating efficiencies will increase. The increasing use of lower capital intensive and
mini steel mills using electric arc furnaces and continuous casting steel making
processes will improve the competitive position of the its steel industry.
2.6 Steel Demand
The previous sections outlined supply characteristics, this section outlines demand
characteristics. The International Institute of Steel’s standard methodology (IISI 2002b,
p107) is to use the term apparent crude steel consumption to measure and report crude
steel consumption. This term is made up of a country’s production plus imports less
exports. Exports and imports are converted to crude steel equivalent using a factor of
1.3/(1+0.175c)6, where c is the proportion of domestic steel that is continuously cast.
This term is used throughout this thesis.
6 The reciprocal of this factor is applied to gross up import and export terms.
38
2.6.1 World Apparent Crude Steel Consumption Chart 2.10 shows modest growth in world apparent crude steel demand since the early
1970s. Demand in most developed regions has not been increasing at the same rate as
that of some of the developing countries. In fact, some of the developed countries are
now showing a modest decrease in demand.
Chart 2.10: World Apparent Crude Steel Consumption, 1972 - 2001
Data sources: International Iron and Steel Institute (Statistical Yearbooks from 1982 to 2002)
It is to be expected that when the cycle of increased demand in the developing countries
peaks, we should see in the mid to longer term, both world iron ore and steel production
peaking. The impact of this will be significant for Asian, European and North
American trade. To illustrate the relative differences in regional demand for steel,
Chart 2.11 compares steel demand by regions since 1990. It shows Asia consistently
with the highest demand for crude steel.
0
100
200
300
400
500
600
700
800
900
1000
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Wor
ld S
teel
Con
sum
ptio
n (M
illion
tonn
es)
39
Chart 2.11: World Apparent Crude Steel Consumption by Region, 1990 - 2001
Data source: International Iron and Steel Institute
Chart 2.12 shows in more detail the apparent crude steel consumption for the leading
producer countries from 1972 to 2001. The USA and Germany’s consumption of steel
have been gradually decreasing, while at the same time Japan experienced modest
growth up until the early 1990’s from which time demand started to decrease. Both
China and Korea have consistently had considerable growth. China’s growth has been
the most dramatic, increasing from 25.7 to 169.9 million tonnes between 1972 and
2001. It now has the highest total demand consumption of the leading producer
To complete this review of the global iron and steel industry, Chart 2.14 shows the
employment levels in the steel industry of the leading producer countries.
Notwithstanding the decrease from 2.3 million workers in 1996 to 1.8 million in 2002,
compared to the other leading producers (Japan 176,000, USA 124,000, Germany
74,000 and Korea 57,000), China’s steel industry employment figures are still very
large. However, it is not accurate to directly compare these figures, as the structure of
employment in China is different. Many of the employees being reported in statistics
are actually retired workers and also ones on special employment conditions that enable
them to receive benefits from the company. In 1974 when Europe was a major
industrial producer, the total number of people employed in the steel industry was
790,000 (IISI 1981, p.18). So as China’s industrial activity has also grown, it is not
such a surprise given the nature of the welfare in China that high numbers of employees
are registered in the industry. Nevertheless, it does demonstrate a need for the Central
Government to continue with reform of China’s steel industry.
Chart 2.14: Leading Producer Countries' Employment in the Steel Industry, 1975 - 2002
Data source: International Iron and Steel Institute
0
500
1,000
1,500
2,000
2,500
1975 1995 1996 1997 1998 1999 2000 2001 2002
Em
ploy
men
t in
the
Ste
el in
dust
ry (t
hous
and
peop
le)
PR China USA Japan Germany Korea
43
Clearly, China still has a long way to go to reduce employment in the industry to bring
it to the levels of the other leading producer countries. This demonstrates the industry
has much capacity for reform to increase efficiency and lower unit costs, which
supports its potential to maintain competitive position in the global trade of steel
products. This will be important as labour costs increase along with the country’s
economic development. The challenge for China is managing this transition from a
social perspective. Considering China’s history in relation to the impact of social
inequalities, this social challenge could have the potential to derail China’s economic
development and subsequently its trading comparative advantages as workers adjust to
a changing income and welfare conditions. This is discussed in more detail in Chapters
5 and 6, particularly as it was found to be a major concern.
2.8 Discussion
As the iron and steel industry has traditionally been a significant contributor to a
country’s economic development, then it is not surprising that we have seen capacity
growth in developing nations much of which has been at the expense of developed
nations. This has resulted in an excess of global steel capacity. This is more critical on
a regional basis, where western regions have lower demand versus other regions. In the
mid to longer term particularly either after or when China reduces demand (resulting
from its infrastructure construction programme), the excess capacity will produce
excess stocks resulting in downward pressure on steel prices. An OECD report (cited in
Asia Financial Times 2002) states that there is around 200 million tonnes of spare
capacity in the global market. It appears that even with major efforts to balance supply
and demand through international agreements to close production plant capacity by
between 93.5 and 97.5 million tonnes (Marsh & Mann 2001), it is likely to take up to 20
44
years to achieve the correct balance. Traditional dominating regions like Europe and
North America will continue to see their steel industry slowly disappearing as they
battle the lower cost and efficient Asian producers. This will continue to cause tension
in the industry. Unions in the USA will likely continue with demands for tariff and
industry trade protection. It is likely that the WTO will have a major role to play in
future trade negotiations to ensure that “creative in concept” trade barriers are not put in
place to protect regional steel industries. These are examined in more detail in Section
5.4. Nevertheless, it is projected that a modest recovery in global steel production to
900 million tonnes by 2005 will occur (MEPS 2001, p.6). This is based on improved
industrial performance from the countries of the former USSR, continued expansion in
China along with India and South East Asian countries and improvements in Japanese
industry. The ABARE (2002a) forecasts that steel and iron ore production in 2007 will
be 908 and 1,119 million tonnes respectively. If recent increasing trends in steel
production (and corresponding increased demand of iron ore) continue, by 2007 the
values will be considerably higher than the forecast by ABARE.
A possible development in the iron and steel industry is futures trading in steel through
exchange markets like the London Metals Exchange (LME). For futures contracts and
trading (either in physical or paper) to be effective, it generally requires commodities
which can be classified by set standards such that they are almost identical no matter
where they originated from. If trades were physical, it would mean setting up steel
stores around the world where stocks could be called upon as needed. This
development could open up new opportunities to improve trading performance. Having
the ability to be “short” or “long” in steel products would improve price transparency
and would enable buyers and sellers of crude steel, products and even iron ore to hedge
45
exposures to future price and/or supply shocks. Unfortunately, this concept is not new
and according to Morrison (2003, p.24), it was first tried in 1872 when an informal
metals exchange in London launched a steel futures contract only to stop several
months later. Morrison also reports that Enron offered online swap trading in steel.
This occurred during the latter part of the 1990s. Nevertheless, the idea of steel future
contracts and trading is no different to what is being done for other commodities and
this initiative is considered to have great potential.
2.9 Conclusion
The global iron and steel industry plays an important role in both satisfying a country’s
domestic demand for steel and for export trade both of which have a significant impact
on a country’s economy. With the exception of China, regional steel production has
remained relatively constant as countries endeavour to maintain their industry and steel
making capability. Changes in the steelmaking plant have seen the end of the
traditional open hearth process plants with more focus on cost efficient electric arc
plants combined with continuous casting processes. This has been most evident in
North America through increasing use of minimills. Supply side economics show that
as a result of high capital costs, long plant construction times and the importance of low
cost factor inputs (iron ore, energy and labour); barriers of entry are difficult to
overcome. This means that to enter the industry, long time horizons are involved.
Before China could industrialise and develop the economy, it was important to have an
industry that could satisfy its demand for steel. The Chinese iron and steel industry has
developed in a time of global excess capacity and continuing uncertainty. China’s path
to developing such an industry started at the early part of the nineteenth century.
46
3 Chinese Iron and Steel Industry–Marshall of Industry
The previous chapter presented an overview of the global iron and steel industry. This
chapter looks at the Chinese iron and steel industry in detail and how it compares
globally. It also examines the importance of Chinese history and culture in enabling the
country’s iron and steel industry to play such an important part in its economic reform
and industrialisation.
The Qing government attempted early modernisation reforms. This programme of
modernisation was known as the Yangwu (foreign matters) movement between 1865
and 1894. It included the establishment of modern arsenals and direct military
industries, building up a modern navy, founding of modern enterprises and the
establishment of a western style iron and steel works (Su 1986). The iron and steel
works were built at Guangzhou and were later moved to Hanyang. They consisted
mainly of British machinery. This early attempt at having a national iron and steel
industry saw output from the plant’s blast furnace being only 22,000 tonnes. In 1890,
Governor Chang Chih-Tung established an iron and steel works in Hunan (Metal
Bulletin 1978, p.5). The war with Japan in 1894-1895 interrupted China’s attempt to
industrialise.
This raises the question why China’s early attempts at reforming the economy and
becoming a modern industrialised economy like Japan failed. Japan had developed a
strong military capability, which was a result of the Samurai class who ran Japan’s early
governments. They had already constructed a light industry and quickly moved to
import machinery and build a heavy industry along the lines of the west. Japan’s ruling
class were military in discipline and strategic unlike in China where Confucian
47
philosophy focused more on a well-educated public service. As a result of
industrialisation and at the same time developing a strong military, Japan was able to
enjoy economic development long before China. Interestingly, since the People’s
Republic was founded in 1949, China’s military sector has in fact developed ahead of
the economy. It seems that although the steel industry is a key driver in economic
development so also is military might7. China’s solid economic performance seems to
have followed growth in its military capability, in addition to being driven by the iron
and steel industry’s role in industrialisation.
History is an important part of Chinese culture. To better understand how the country’s
iron and steel industry developed, the following sections outline the key periods that
shaped the industry and then go on to examine the industry in detail. The connection to
the country’s economy is highlighted and discussed in detail so that industry’s role in
the economic development can be shown.
3.1 History of China’s Iron and Steel Industry
China is one of the largest countries in the world both in land area and in population, a
country, which is endowed with most natural mineral resources. As early as AD 100
the Chinese had discovered how to make steel (AME Mineral Economics 1999, p.C24).
It is one of the oldest civilisations in the world, but as a result of a turbulent history, it
took a long time before it was able to take advantage of its resources and skills. This
section looks at a brief period in China’s history as it relates to the development of its
iron and steel industry.
7 A similar view is suggested by Mailer (2003) in his conclusion that the only way America can get off its present economic downslope is for the government to “become a regime with greater military presence and drive to ward empire”. He suggests that America may use Iraq as an excuse for moving in an imperial direction.
48
Sun Yat-Sen was an important figure in Chinese history. Born in 1867, he became a
key figure in the Guomindang, the nationalist party in China that eventually became the
enemy of the communist party. Sun Yat-Sen was a strong believer in China becoming a
republic and developing industry and agriculture. He never had the opportunity to
realise these beliefs as Chinese politics and society were to continue in disarray.
Eventually, Mao’s communist forces defeated his nationalist party and a new chapter in
Chinese history started. In relation to the model of industrialisation by way of the iron
and steel industry, since the People’s Republic of China was proclaimed on 1 October
1949 four periods of major significance have occurred. These periods include the
centrally planned five-year plans and are:
Period 1 (1949-1957): Founding of the PRC, Rehabilitation, Planning Model and
Stability
In 1949, China’s economy and industry were in very poor shape following the Chinese
civil war (1946-1949). Following the establishment of the People’s Republic of China,
Mao Zedong had to recover the economy. At this time, China’s annual steel production
was very low at 158,000 tonnes, insignificant in relation to global steel production.
China needed to choose a model for economic development. The choice was between a
Japanese model (based on a market economic system) and the soviet or Stalinist
centrally planned model. The Communist Party had a good relationship with the USSR,
so felt it was better to move in that direction and receive support at the same time.
China signed the Treaty of Friendship Alliance and Mutual Assistance, which provided
the country with financial aid to modernise its industry. Mao Zedong copied the
USSR’s five-year planning model, first used by Stalin in 1928. An important aspect of
49
Stalin’s first five-year plan was developing the iron and steel industry, so that the
country could rapidly industrialise. The main reason for this was to ensure the country
was able to defend itself from capitalist countries (Five Year Plan, on line, 2003). Two
guiding principles were adopted from the soviets – Marxist principles of common
ownership and the Stalinist central planning, particularly in relation to resource
allocation, suppression of light industry in favour of heavy industry. Mao Zedong
added a third guiding principle – the principle of regional economic self-sufficiency
(Demurger et al 2002).
The first planning period implemented was known as the Period of Rehabilitation (1949
– 1952). This was a period that was to allow gradual rehabilitation and rebuilding of
the nation. It was a time for industry to recover from the Chinese civil war and to
develop production and administrative systems. Between 1949 and 1952, 329.3 million
yuan8 was spent in the metallurgical sector (Metal Bulletin 1978, p.8) and steel
production during this period is shown in Table 3.1.
Table 3.1: Steel production during the Period of Rehabilitation (1949-1952)
Year 1949 1950 1951 1952 Steel Production
(tonnes) 158,000 606,000 896,000 1,349,000
Data source: International Iron and Steel Institute
8 This represented 11.6% of total investment in capital construction.
50
During the Period of Rehabilitation, China’s steel production increased from 158,000 to
1,349,000 tonnes. This represented a 754% increase over 4 years. In order to recover
from the damaging civil conflicts, the government was relatively liberal in their policies
and actually gave incentives to workers and owners. The growth in steel production
during this period suggested that the more liberal policies were effective.
Following the Rehabilitation Period was the First Five-Year Plan (1953-1957). This
plan was copied from Stalin’s model, and was China’s first attempt to map out a
programme to achieve industrialisation. With the emphasis on the soviet model, Russia
played an important role in the implementation of the plan. By copying the soviet
model, this could be considered an early period of transition to socialism for China.
The plan targeted heavy industry for major reform, with an emphasis on steel, coal and
iron production. Table 3.2 compares the plan values (estimated and actual) to the pre-
plan year (1952) values for coal, pig iron and steel.
Table 3.2: Planned and Actual Steel Output Compared to Pre Plan Steel Output
Steel Output (million tonnes) 1952 1957 planned 1957 Actual
Coal 63 113 124 Pig Iron 1.9 4.7 5.8
Steel 1.3 4.1 5.35
Data sources: http//www.historylearningsite.co.uk/china_china_five_year_plan.htm (viewed 3 March
2003) and China Steel Statistics 2000, p.1 (The State Administration of Metallurgical Industry)
Table 3.2 shows that the planned output values for coal, iron and steel were not only
achieved, but were also exceeded. This encouraged the government to continue with its
planning reforms to develop steel production. At the start of the First Five-Year Plan,
apparent consumption was only 2.4 million tonnes and has averaged an annual growth
51
of 9.1% to reach 167 million tonnes in 2002 (CEIS 1203 2002). The objective of the
First Five-Year Plan was to establish a foundation for socialist industrialisation. This
was to emphasise steel production and with the help and expertise of USSR, existing
steelworks were expanded and new integrated mills were built. The plan called for
2,930 million yuan9 to be allocated to the iron and steel sector (Metal Bulletin 1978,
p.8). The State Statistical Bureau (cited in Dorian 1994, p.56) reports that more than 86
billion yuan were invested in capital construction during 1952 to1958 of which 22.4%
was for heavy industry. According to Sugimotto (1993, p.268), investment in the steel
industry during the First Five-Year Pan period was 15.16% of all industrial investment
in China. This equates to the 2,930 million yuan reported by the Metal Bulletin. In
1953, steel production was 1,700,000 tonnes and at the end of the First Five-Year Plan
period in 1957, production had increased to 5,350,000 tonnes - an increase of 214.7%.
Table 3.3 shows the steel production for each year during the First Five-Year Plan.
Table 3.3: Steel Production during the First Five-Year Plan, 1953-1957
Year 1953 1954 1955 1956 1957 Steel
Production (tonne)
1,700,000 2,230,000 2,853,000 4,465,000 5,350,000
Data source: International Iron and Steel Institute
During this period the Anshan Iron and Steel works in Liaoning Province were
established. Anshan went on to become China’s second and the world’s eighteenth
largest steel producer in 2002. The First Five-Year Plan results were good for industrial
development but with only 6.7% of the total nation’s funds spent on agriculture the
country did not develop as well (Su 1986, pp.213-214). This was recognised by Mao
9 This represented 12.8% of central investment funds.
52
Zedong and was part of his speech on the “Ten Major Relationships” in April 1956. In
this speech, he outlined the importance of agriculture to ensure food and basic needs
provision for workers.
Period 2 (1958-1976): Instability Caused by the Great Leap Forward Campaign,
Recovery and Readjustment
The next milestone was the Second Five-Year Plan (1958-1963). During this planning
period, agriculture and industry were to develop. The five major objectives of the plan
translated from the Premier Zhou Enlai’s proposals delivered in September 1956 at the
Eighth Chinese Communist Party National Congress (Liu Suinian & Wu Qungan 1986,
cited in Dorian 1994, p.58) were:
1. Carry out industrial construction centring around heavy industry, speed up
the technical transformation of the national economy and lay a solid
foundation for China’s socialist industrialisation
2. Accomplish the task of socialist transformation, consolidate and expand
ownership by the collective and ownership by the whole people
3. Further develop industrial, agricultural and handicraft production and
appropriately develop transportation and commerce
4. Make great efforts to train qualified personnel for national construction
and upgrade scientific research work
5. Strengthen national defence and improve the people’s material and cultural
well-being.
The Great Leap Forward campaign (1958 –1959) started in 1958 but embraced if not
displaced the second five-year planning period and the results of the campaign were to
53
extend through to 1962. This campaign was a milestone where China departed from
strict adherence to the soviet model. Planning was decentralised and People’s
Communes were set up. It was during this period Mao Zedong called steel “the
Marshall of industry” and ordered steel production to be doubled within one year from
5.35 to 10.7 million tonnes (Chang 1991, p.293). Mao Zedong wanted to see China’s
economy overtake that of Great Britain and the USA within 15 years. Priority was
given to steel production over other industries and backyard furnaces were built all over
the country. Iron, steel fences and items were collected and melted in these primitive
furnaces. Steel was to be produced locally and consumed locally. A drive to produce
steel throughout the country had communes setting up backyard furnaces. Steel output
was to reach 10.5-12 million tonnes by 1962 (Dorian 1994, p.59). It is estimated that
600,000 furnaces were set up and 11 million tonnes of steel were produced (Great Leap
Forward 2003). Unfortunately, the quality of the iron produced in these furnaces was
poor with high sulphur content. This caused many problems with plant and machinery
made from it.
With the Great Leap Forward campaign, China’s overzealous plans did not enable
factors of production to be efficiently allocated. Raw material use was inefficient, with
no incentives, labour was not effectively utilised and capital was not properly managed.
This was to give rise to economic shocks, the waves of which extended beyond
industrial to agricultural production. During this turbulent period, steel production was
as shown in Table 3.2.
54
Table 3.2: Steel Production during the Great Leap Forward Period
Steelmaking pig iron, slabs, blooms, wire rod, heavy joists, heavy tees, heavy angles, heavy channels, heavy & medium plates, hot & cold rolled uncoated sheet/coil, hot dipped galvanised sheet/coil, colour coated sheet/coil, electrolytic single reduced tinplate, seamless tubes & pipes
Wire rod, bars, light sections including I-beams, rails, hoop, strip, sheet/coil, seamless tubes and pipes
3.88 3.92 4.21 4.8
Data sources: The Tex Report, Iron Ore Manual 2002-2003; Iron and Steel Works of the World 2002, International Iron and Steel Institute (2002 output data)
67
Appendix 9.1.14 gives the relative rankings of global producers. Amongst them,
Baosteel ranks 5th and Anshan 18th, all others are well down the listing confirming again
the low concentration of medium to large steel producers. Shanghai’s Baosteel
Corporation can be seen to be China’s largest and most significant steel producer. In
2002, it produced 19.5 million tonnes of steel, followed by Anshan with 10.1 million
tonnes. Baosteel has the highest profit of all china’s steel producers. In 2002, it earned
more than 7 billion yuan in profit. Baosteel also has China’s most modern plant which
helps give the highest steel productivity figures for the nation. Baosteel is expected to
have an annual sales income of 120 billion yuan (US$14.5 billion) by 2005 (CEIS 0618
2003, art.028).
According to the China Iron and Steel Association (cited in CEIS 0414 2003, art.034),
major Chinese steelworks made a total profit of 24 billion yuan in 2002. This
represented an increase of 42.84 percent year-on-year, out of a sales revenue of 444
billion yuan, which was up 16.16 percent. Wuhan and Anshan earned more than one
Data sources: *1 - Asia Development Bank- Key Indicators – PRC 2001, P.124 *2 - China Steel Statistics 2000, State Administration of Metallurgical Industry pp.66-68 1999 Oil
Data source: *1 - Asia Development Bank- Key Indicators – PRC 2002, P.126-127 *2 – BP’s Statistical Review, June 2003 *3 - China Steel Statistics 2000, State Administration of Metallurgical Industry pp.66-68 2000 Oil
(million tonne) Gas
(billion M3) Coal
(million tonne) Electricity
(billion KWh) Whole *1 country 230.1*2 27 1,000 1,356 Steelmaking*3 1.790 na 36.130 69.510 Percentage 0.78% na 3.61% 5.13%
Data sources: *1 - Asia Development Bank- Key Indicators – PRC 2002, p.126-127 *2 - BP’s Statistical Review, June 2003 *3 - China Steel Statistics 2001, State Administration of Metallurgical Industry pp.84-87 Table 3.9 shows that the steel industry by 2000 had not made the change away from
coal as a major fuel source. This is a change that will take place as the Central
Government aims to improve environmental conditions – particularly with the Beijing
Olympics event in 2008.
93
The industry’s base energy supply is coal of which China has adequate reserves.
Together with low labour costs, the country has the potential to remain the world leader
in crude steel production for many years. Japan used the coal industry to rebuild its
economy, then made the shift to imported oil and has shown that even with no energy
resources, with careful management of this important input, a country can still make
outstanding economic progress. Unlike Japan, China has had abundant energy
resources (in the form of coal) to support its economic growth. However as a country
develops, it pays more attention to the wellbeing of both its people and the environment.
As China’s energy appetite grew to fuel its GDP growth, pollution became a serious
problem which could not be permitted to continue becoming worse every year. This
caused shifts in consumption of coal to more use of oil in the first instance then gas as it
became more available on international markets.
Chart 3.17 illustrates China’s daily coal consumption since 1980. It shows coal
consumption increasing from 649 to 1,447 million tonnes per day (or 123%) from 1982
to 1996 - during a period when other Western countries were trying to reduce
consumption at the same time as their energy requirements were increasing. Chart 3.17
shows China’s direct coal consumption in million tonnes and also its international oil
equivalent in tonnes. This allows comparisons with other countries. One tonne of oil
equivalent equals approximately 1.5 tonne of coal (BP 2003). It can be seen that China
has a long way to go before it reaches the low coal consumption values of Japan, which
built its industry on coal then shifted to oil and then gas. Environmental issues will
push China to replace coal with cleaner fuels. This will reduce the competitive
advantage the country enjoys from its use of coal as an energy source.
94
Chart 3.17: Annual Coal Consumption for Selected Countries, 1980-2002
Data sources: Oil Equivalents - BP Australia Energy Review & China direct Coal - Asian Development Bank
Since 1996, China’s government has made great efforts to reduce pollution and lower
use of coal. Its major power stations still use coal, but improvements in plant are being
made to reduce pollutants. China is gradually replacing coal with oil and gas.
Consumption of these is shown in Charts 3.18 and 3.19. The charts show that China’s
oil consumption has been increasing significantly since the early 1990s to overtake
Japan’s consumption of 242.6 million tonnes in 2002 by 3.1 million tonnes. Since
making the shift from coal to oil, Japan has been reducing oil consumption and moving
to the use of gas. Chart 3.19 shows the increasing use of gas by Japan since 1980.
China is lagging this pattern, but is slowly moving in the same direction. Use of less
coal and more oil and gas has made China become heavily reliant on energy imports –
similar to Japan. This is causing the Chinese government concern, as it now needs to
ensure long term secure supply of these resources.
Table 4.2 shows that since 2000, China has been Australia’s 3rd largest trading partner
closely followed by Korea. Japan and the United States took first and second place
respectively. As both Japan and the United States lose their competitive position in
producing a wide range of goods to China and at the same time, China’s economy
continues to grow along with industrial production and consumer demand, it is likely
that trade will shift from the USA and Japan towards China. The US currency has been
high for several years and will need to considerably drop to enable the country to
become more cost competitive. Japan lost much of its competitive position when its
exchange rate substantially increased. Only after an economic recession18 and
significant devaluation of its exchange rate, will Japan be able to improve its
competitive position in the international market place. It is likely that the reduced trade
with Japan and the United States will not only be lost to China, but also a developing
Korea. For trade other than iron ore, this will be important for both China and Australia
bilateral trade developments in the coming years. As China increases trade in goods,
this will help maintain and even increase demand for steel. This in turn will increase
demand for iron ore.
18 The recession will end when Japan’s economy is restructured. This process is occurring.
127
Table 4.2, Australia’s Merchandise Trade with the top 5 Trading Countries 2000-2002
Data sources: DFAT 2001, 2002 and 2003
4.2 Comparative Advantage
As outlined earlier, iron ore is the principle raw material input to the steel making
process and Australia is one of the world’s leading suppliers. The first deposits of iron
ore were found in 1880 on Koolan and Cockatoo Islands in Western Australia. In 1907,
mining commenced at Koolan Island on a relatively small-scale basis. In 1935, a
London-based firm called H.A.Brassert and Company Limited acquired leases over the
iron ore deposits at Koolan Island for the purpose of export to Japan (Blockley, Reid &
Australia Merchandise Trade by Country, 2001 -Rank Country Net Exports
USD,000 % Share USD,000 % Share USD,000 USD,000 % Share1 Japan 13,045,717 19.36 8,392,673 12.45 4,653,044 21,438,390 31.812 United States 6,558,781 9.73 11,775,906 17.47 (5,217,125) 18,334,688 27.203 China 4,171,160 6.19 5,671,717 8.41 (1,500,556) 9,842,877 14.604 Rep of Korea 5,240,787 7.78 2,549,223 3.78 2,691,564 7,790,010 11.565 New Zealand 3,947,094 5.86 2,607,647 3.87 1,339,447 6,554,741 9.73
World Total 67,400,508 48.91 64,757,840 45.99 2,642,668 132,158,349 94.90
Exports Imports Total
Australia Merchandise Trade by Country, 2000 -Rank Country Net Exports
USD,000 % Share USD,000 % Share USD,000 USD,000 % Share1 Japan 12,014,333 19.79 8,423,674 13.10 3,590,659 20,438,006 16.342 United States 6,038,748 9.94 12,717,759 19.77 (6,679,011) 18,756,508 15.003 China 3,305,461 5.44 4,990,132 7.76 (1,684,671) 8,295,593 6.634 Rep of Korea 4,976,250 8.20 2,641,543 4.11 2,334,708 7,617,793 6.095 New Zealand 3,610,410 5.95 2,467,607 3.84 1,142,803 6,078,017 4.86
World Total 60,722,734 49.31 64,320,601 48.57 (3,597,868) 125,043,335 48.93
Exports Imports Total
Australia Merchandise Trade by Country, 2002 -Rank Country Exports Imports Net Exports Total
USD,000 % Share USD,000 % Share USD,000 USD,000 % Share1 Japan 12,190,200 18.56 12,731,400 19.38 (541,200) 24,921,600 37.942 United States 6,342,600 9.66 8,657,550 13.18 (2,314,950) 15,000,150 22.833 China 4,602,400 7.01 7,066,400 10.76 (2,464,000) 11,668,800 17.764 Rep of Korea 5,484,600 8.35 3,215,300 4.89 2,269,300 8,699,900 13.245 New Zealand 4,356,000 6.63 4,035,350 6.14 320,650 8,391,350 12.77
World Total 65,689,800 50.20 70,203,100 54.36 (4,513,300) 135,892,900 104.55
128
Trendal 1990), and in 1936, the Yampi Sound Mining Company also tried to export the
commodity to Japan. At this time, it was reported that the Australian Government was
concerned about Japan’s military ambitions19 (Iron Ore 2003). In May 1938, the
Commonwealth Government announced its intention to impose, by amendment of the
Customs Regulations, an indefinite embargo on the export of iron ore to take effect
from 1 July 1938 (Blockley, Reid & Trendal 1990). The embargo was subsequently
lifted in December 1960, by which time more exploration discoveries had taken place
and the industry was now freely able to develop into being a major supplier to the
global iron and steel industry and was to develop into being one of the country’s leading
export industries. Since that time production has increased from below 10 million
tonnes to over 180 million tonnes (Western Australia, Department of Industry and
Resources 2003).
Over 91% of Australia’s iron ore resources are located in the Northwest region of
Western Australia in an area called the Pilbara. Flint (2003) reports that as at 31
December, 2002 the measured and indicated resources of high grade iron ore total 9,149
million tonnes and the inferred resources total 9,900 million tonnes. Without any
further discoveries, at the current rate of mining this will last approximately 100 years.
The most suitable ore from Western Australia for making steel is Brockman low
phosphorous iron ore. Notwithstanding that Australian iron ore producers are
prolonging its life by blending with other ore body types, this type of ore is being
depleted and its dominance in the industry will progressively decrease over the next 20
years (Townsend & Flint 1997, p.64). A map showing the locations of operating mines,
reserves, road and rail is in Appendix 9.16.
19 By this time Japan had invaded China.
129
Although iron ore production plants are very capital intensive, since Australian ore
bodies are easily accessible when the producing plant and associated infrastructure are
in place, then additional production and transporting costs make Australian iron ore
very cost effective for China to purchase. Ease of access to reserves and short shipping
distances give Australia a competitive advantage over other countries with fewer
reserves and which may be more difficult to mine and subsequently transport.
4.3 Iron Ore Production
Chart 4.6 illustrates Australia’s annual production of iron ore between 1950 and 2002.
As mentioned earlier, the commonwealth government imposed an embargo on
exporting iron ore in 1938, this being lifted in 1960. At the time of lifting the embargo,
production output was 4.45 million tonnes. Subsequently, during the 1960s, Australia’s
production and trade in iron ore started to rapidly increase. By 1965, it had increased
by 55% to 6.89 million tonnes. Then between 1965 and 1975 it increased from 6.89 to
97.65 million tonnes. From 1975 to 1990 production was relatively constant, then
along with increased demand in Japan followed by increase demand in China,
production rapidly increased during the 1990s, 2000, 2001 up to 183 million tonnes in
2002.
130
Chart 4.6: Australian Iron Ore Production, 1950-2002
Data source: Department of Industry and Resources (DOIR) 2000-2001 and 2001-2002
Even with the increases in production capacity, Australia has still not been able to keep
up with the China’s demand. As outlined earlier, this has been a result of capacity
constraints that can take several years to put in place. As a result, the country has lost
tonnage to competitor countries like Brazil and India. Such tonnage loss could have
been avoided if a better knowledge of China’s potential existed during the latter part of
the 1990s. At that time, the Australian iron ore industry had a major focus on lowering
costs and restructuring work practices. This demonstrates the need for high quality
market research being an important aspect of the longer-term strategy formulation.
4.4 Iron Ore exports
Trade in Australia’s iron ore exports in both tonnage and dollars are shown in Charts
4.7 and 4.8 respectively. In total, Japan has the largest share with 70.71 million tonnes
(39% of total) followed by China with 43.9 million tonnes (24.2% of total). China is
behind Japan even although it is the world’s largest steel producing country; this is
because China still uses large quantities of its own domestic iron ore while Japan has no
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domestic resources of iron ore. Australia’s iron ore exports to Korea and Taiwan have
been increasing over the past several years, while exports of iron ore to Europe have
been falling since 1997 (with the exception of 2000, where an increase occurred). As
Korea develops, export trade to that country has significant potential to increase.
Chart 4.7: Australia’s Iron Ore Exports in 2002
Data source: Iron Ore Manual 2002-2003, The Tex Report, p.36
Chart 4.8: Value of Australia’s Iron Ore Exports, 2002
Total 181 million tonnes
16.915
14.306
9.41225.309
43.906
70.71
Japan
China
South Korea
Taiwan
Europe
Others (diff from total)Note: All values in million tonnes Values used are for Western Australia which account for most of Australia’s exports of Iron Ore
Total US$2.68 billion
19.8
179.1
190.5
399
742
1,149.40
Japan
China
South Korea
Taiwan
Europe
Others (diff fromtotal)
132
Data source: DOIR 2002 - Statistics Digest, Department of Industry and Resources, Western
Australia. Values are principally Western Australian values (other Australia represents only 3%
of Australia exports).
Traded destinations and quantities of Australian iron ore are presented in more detail in
Chart 4.9. This shows that Japan is still Australia’s prime market for its iron ore. In
1976, Australia was supplying Japan with 63 million tonnes of ore and this remained
constant through to 1999 when it grew to 69 million tonnes, thereafter it continued
steadily growing to 70.7 million tonnes in 2002 (an increase of 12.2% in tonnage). In
1976, Australia was only supplying China with 1.37 million tonnes, this increased to
26.5 million tonnes in 1999 further increasing to 44 million tonnes in 2002. During this
same period, Japan’s steel production remained constant from 107.4 million tonnes in
1976 to 107.7 million tonnes in 2002. Australia was successful in winning more market
share from its competitors20. During the same period, China’s steel production
increased from a very low 20.5 million tonnes in 1976 to 181.5 million tonnes in 2002.
The chart shows that the gap between China and Japan is closing. This gap will
continue to close as long as China can sustain its iron and steel growth and Japan’s steel
production drops as the potential for it to lose market share to the Chinese steel industry
is high. The timing will depend on when China’s steel industry focuses on export
markets rather than domestic construction. This is not expected to occur until after the
Beijing Olympics in 2008. To take advantage of lower overheads and China’s
comparative advantage of lower labour and resource costs, it is very likely that Japan
will participate in more joint ventures with China’s major steel producers. This means
that the China market has significant potential to become larger. Australian producers
need to plan accordingly.
20 Australia’s comparative supply advantage helped gain market share in Japan.
133
It can be seen from Chart 4.9 that from the mid 1990s, Australia’s iron ore exports to
Europe and other countries is decreasing while increasing to Asia. With the closeness
to Asia, costs to supply there are lower. This in turn increases profit margins for the
Australian producers.
Chart 4.9: Destinations and Quantities of Australia’s Iron Ore Exports, 1975-2002
Data sources: Tex Reports, Iron Ore Manuals – 1987 through 2003.
4.4.1 Outlook for Australia’s Iron Ore Production Chart 4.6 showed Australia’s production of iron ore between 1950 and 2002. What is
the outlook for the next several years? Considering output 1999-2002 (149.97 to 182.7
million tonnes respectively) this represented an increase of 8.18 million tonnes per
annum. The ABARE (2002b), estimates that Australia’s iron ore output will increase
from a 2002 level of around 183 million tonnes to 209.5 million tonnes in 2007. Details
are shown in Table 4.3.
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134
Table 4.3: Australia’s Estimated Iron Ore Output, 2003 - 2007
Australia Production Units 2003 2004 2005 2006 2007
Iron Ore (Million tonnes) 189.0 194.5 199.5 204.5 209.5
Data source: ABARE, Australian Commodities, Forecasts and Issues, 2002 p.112
For the period 1999-2002, Chart 4.9 showed increases in supply to both Japan and
China. All else equal, the upward supply trend to Japan should not change much. With
preparations for the Beijing 2008 Olympics, strong demand for steel in China is
expected to continue. This suggests that ABARE’s estimate is conservative and the
outlook for Australian iron ore exports to China is even more favourable.
4.4.2 Pricing of Iron Ore - Setters or Takers Iron ore is supplied in two basic forms. One is in the form of lumps, which range in
size from 6.3mm to 31.5mm and the other form is called fines, which range in size from
0.150mm to just under 6.3mm. Depending on which process is being used in the steel
making plant, either lump or fines are used. Lump product can be injected directly into
some furnaces whereas fines products require to be pre-treated (agglomerated into sinter
or pellets). As a result, lump iron ore is generally preferred, as it requires lower energy
input to the steel making process. This benefit of lump attracts a premium in price from
steel makers. Iron ore in the form of lumps is becoming a scarcer commodity; iron ore
producers are more able to supply fine products. In 2002, Australia exported 48.5
million tonnes of lump product and 116.7 million tonnes of fine products (The Tex
Report 2002-2003). As a result of the larger market being for fine products, traded
prices for iron ore are based on this. A benchmark or representative marker is the cost
of fines into Japan as this represents the largest proportion of the trade in ore. A
135
differential is normally added for iron ore lump prices on top of this representative of
fines price. A common unit for basing pricing on is US cents per dry long ton21 iron
unit. It is converted to metric tonnes by multiplying by the iron content of the traded
ore, then by a conversion factor of 1.016. Dry tonnes are used since iron ore can
contain moisture, some deposits more than others. Customers do not want to pay, for
example, for shipping and supplying water. Generally, contracts are for iron ore to be
“FOB” (free on board). Subsequent costs of sea freight have significant bearings on the
directions of traded iron ore. Sea freight of international bulk commodities is subjected
to global market supply and demand conditions. This introduces a degree of volatility
and uncertainty generally from year to year for the longer-term contracts with spot sales
of iron ore being subjected to the volatility of sea freight rates.
Chart 4.10, shows the price of fines into Japan since 1973. The results show that up to
1982, prices increased, and then the price has trended down, recovering to an upward
trend in 1999. The figures in the chart are in current dollars, so if we consider inflation,
prices have certainly dropped. If not for strong Chinese demand, reductions in price
would have been larger. The market is still competitive due to Brazil and India. As
European demand decreases which generally occurs as Asian steel producers increase
their market share, Brazil and India enter the Asian market to ensure they can clear their
products. This leads to demanding trading conditions that put downward pressure on
prices. More and more Australian producers are being challenged to maintain profit
margins. This is being balanced by continuing strong Chinese demand.
21 Ton is the American short ton and requires conversion.
136
Chart 4.10: Price of Iron Ore (Representative Fines) into Japan, 1973-2003
Data sources: The Tex Report, Iron Ore Manuals – 1975-2003
By continually producing iron ore at lower costs and at the same time compensating for
lower quality ore bodies by processing and blending22, Australian producers can
maintain their market leadership. Australia’s iron ore productivity has increased
continually from 15,500 tonnes per employee in 1992 to 22,500 tonnes per employee in
1998 (SBC Warburg 1998, p.42). During 2003, productivity levels would be closer
45,000 tonnes per employee.23
The outlook for the industry should see increasing demand for downstream products -
pellets made from fines and hot briquette iron. Australia with its large resources of gas
for energy together with its advanced and well established iron ore production plants
should be well placed to increase trade in these newer iron ore products. Will Australia
be able to take advantage of economic uncertainty and competitive global iron ore
trade? It is important for producers to continue endeavouring to lower costs and
improve productivity. At the same time, good quality market research will be required
22 BHP Billiton’s hot briquette production facility in Western Australia is one such initiative.
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137
to ensure that production capacity does not become excess capacity. In the short to
medium term, technical limitations will not help achieve this. To improve their
competitive position in the international market, at some stage, Australian producers
may need to consider sharing infrastructure and cooperating with logistic supply issues.
The other approach is to lock in several long term supply contracts and perhaps equity
arrangements with Chinese steel producers. One major factor, which is increasingly
playing an important role in iron ore trade economics, is sea freight costs. The next
section examines this in detail.
4.4.3 Economics of Iron Ore Sea Borne Trade
According to Holroyd (1992, p.117), to effectively compete in a global market place is a
function of transport costs. The most significant cost component in China’s iron ore
sourcing economics is sea freight costs. These vary with the market rates, but what is
important is the differential cost between the two major sources of iron ore, Australia
and Brazil. Sea freight costs are like a commodity, set by market prices. Apart from
premiums being paid as a result of some international crisis24, the components that
make up sea freight costs in general are: freight/labour cost ratios; port costs
(demurrage, handling fees, time to load and unload), shipping technology, port
restrictions, utilisation (back loading), fuel costs, and ship condition. Economies of
scale also play a major role (very large carriers have lower unit transport costs).
In relation to China’s iron ore shipments from its two major sources, Brazil and
Australia, the three following economic aspects are continually taking on a greater role
in China’s iron ore sourcing strategy and policy:
23 Based on Australia’s current annual output of 181 million tonnes with around 4,000 direct labour.
138
1. At the macro level, geographical distance – Chinese iron ore unloading ports are
6,130 km from Australian iron ore loading ports and 20,120 km from Brazilian
ports. Sourcing iron ore from Australia gives China lower sea freight costs and this
gives Australia a comparative, geographical shipping advantage. The European iron
ore loading ports are further from China, but closer to Brazil. As a result China has
been sourcing more iron ore from Australia rather than from Brazil. Brazil has a sea
freight competitive advantage in supplying to the European market.
2. At the micro level - port depth restrictions (SSY 1999, pp.9-36). The two major iron
ore loading ports in Australia are at Dampier and Port Hedland. Both of these ports
have two major berths. Dampier’s two berths are 21.5 and 17 metres deep. Port
Hedland’s two berths are 19 and 17 metres deep. The largest carriers through the
Australian iron ore loading ports are just under 200,000 dwt25, more usually 170,000
dwt. Brazil’s main iron ore loading ports are at Tubarao and Ponta Da Madeira and
these are 21 and 18 metres deep respectively. As a result, Brazilian iron ore
producers using Tubarao or Ponta Da Madeira, have sea freight advantage in that
they can take over 300,000 dwt. However, unlike Japan and European countries,
the majority of China’s ports that are used for unloading iron ore have capacity
limitations requiring smaller vessels around 170,000 dwt. As a result, Brazilian iron
ore producers’ advantage in its ability to sea freight higher tonnage is more
advantageous to other markets rather than China.
However, China is investing in improved seaport infrastructure and larger sized
vessels will be used more in future. Smaller carriers have higher per tonne sea
freight costs, this makes it more economical for Chinese vessels to freight iron ore
from Australia.
24 The Iraq conflict was a typical example, this causes a war premium and market rates increase.
139
3. In the marketplace, supply and demand. When more ships become less utilised and
available, this lowers sea freight rates (this occurred during the Asian economic
crisis and rates substantially decreased). Volatile market conditions caused by
hostilities breaking out in particular regions, put market prices higher by incurring
war premiums. An urgent need to build double hulled oil tankers due to a European
ban on single hull vessels means that it is more profitable to build these vessels
rather than bulk ore carriers for carrying iron ore. According to a Credit Suisse
report (November, 2003, p.5), the likely lead time for new dry cargo carriers is three
years. This is a major supply capacity constraint.
Brazil has clearly been positioning to be a dominant player in the China market. This
country is taking every opportunity to capture market share from Australia and was
successful for a short period during 1999. During this period, Australia experienced the
unexpected – a significant reduction in differential sea freight costs down to
approximately US$2.00 per tonne (approximately 7% of iron ore price). This was as a
result of the slowing down of steel production caused by the Asian economic crisis.
This reduction caused China to switch ore imports from Australia to Brazil and enabled
Brazil to capture an increased share of the China market. At that time, the sea freight
cost from Brazil to China was only US$5 per tonne compared to Australia’s US$3 per
tonne. This US$2.00 differential is now considered by iron ore companies to represent
the critical value. At this point, it is worth China paying to obtain the slightly higher
iron content ore (1-2% higher). Australian producers could improve iron ore content by
further beneficiation. This further processing is costly. In general, producers do
25 dwt is dead weight tonnage.
140
beneficiate many of their fine products26 to improve iron content and also to reduce
impurity levels. By 2003, sea freight rates increased to US$28 per tonne from Brazil to
China and US$18 from Australia to China. It is interesting to note that sea freight costs
are showing upward price trends while at the same time longer-term price trend for iron
ore is down27. This is an important finding.
In general, mineral economists expect iron ore prices to continue trending lower.
Lower costs per tonne result from improved production methods and customers driving
lower input costs. To maintain trading margins in an increasingly difficult global
market place, Australian iron ore suppliers need to reduce costs per tonne supplied.
4.4.4 Outlook for Australian Iron Ore Trade
To increase iron ore production capacity, the Chinese government is encouraging
foreign companies to participate in joint ventures. Liu Qi (1996, p.8), Executive Vice-
Chairman of the Board China Iron and Steel Industry and Trade Group Corporation
suggests joint-trading agreements with countries (eg Brazil) taking coal from China for
iron ore is a very possible development. In relation to the major Australian iron ore
producers, China has only entered into a joint venture arrangement with Rio Tinto.
They have the A$100 million Channar iron ore joint venture28, which commenced in
1990, a 20 year joint venture with Baosteel Corporation worth A$120 million which
was signed on the 20th December 2001 (Australian Stock Exchange 2001), Shougang
Corporation participating in their downstream processing plant in Kwinana, Western
26 The need for this usually depends on the nature of the ore body from which the ore is mined. 27 As is the case for most mineral resources. 28 China have 40% share of the A$250 million capital cost, Hamersley Iron 60% (Smith 1987).
141
Australia29 and Wuhan Iron and Steel’s signing of a framework agreement in August
2003 to have a strategic partnership which will involve the purchase of 75 million
tonnes of iron ore over 25 years (Interfax 2003). These are positive developments that
have great potential to improve iron ore trade between Australia and China. It also
suggests that there is potential for other Chinese steel producers to develop joint
ventures with Australia’s other major producer, BHP Billiton. That group has an
agreement with Korean steelmaker, POSCO, to develop a West Australian iron ore
deposit at its Mining Area C in the central Pilbara (Oldfield 2001). POSCO took 20%
equity in the Mining Area C development (Bell 2001) to develop the A$300 million
Mining Area C development in the Pilbara, Western Australia. China has contracted
with one of the minor iron ore producers in Australia, Hancock Mining, to take half of
the iron ore output from that company’s Hope Down’s development during the first 5
years (CRU 2002c, Industry developments, p.10).
Pu Haiqing (2000, p.408) stresses the need for China to secure iron-ore interests
overseas in order to safeguard China’s long-term requirements. According to Liu Qi
(1996), China’s iron ore market is characterised by increasing imports, diversified
resources and poor infrastructure. China’s relationship with Australia is good and
Australia has “most favoured nation” status and as a result Australia is China’s first
choice for iron ore (Liu 1996, p.6). This should help both countries to increase trade
with one another.
29 Known as Hismelt.
142
5 China’s Trade Development
It was not until February 1972, when the then President of USA Nixon visited China
that the process of China opening its markets for trade started. By 1979, China had
embarked on a more open market trading journey, subsequently making application to
join the WTO’s predecessor, GATT, in 1986. After 15 years of effort, China became a
member of the WTO on 11 December 2001. The entry of China, one of the world’s
largest markets, into the WTO was considered to represent a watershed in global trade
and in China’s economic history. This membership should enable the Chinese Central
Government to drive economic reforms and could become the focus for many changes
that previously were not considered ideologically correct. This chapter discusses
China’s trade outlook in relation to its iron and steel industry, including: international
trade, trade with Japan and USA, future trade outlook, free trade and tariffs, entry to the
World Trade Organisation, foreign trade policy, structural weaknesses and the future of
the Chinese steel industry.
In just over 20 years, China’s exports have increased from US$13,657 million in 1979
to US$266,200 million in 2001 moving from a world ranking of 30th to 6th. During the
same period the country’s imports have increased from US$15,675 million in 1979 to
US$243,600 million in 2001 moving from a world ranking of 21st to 6th (DFAT 2001
and WTO 2001).
Trade between WTO member countries requires reduction in trade barriers and
development of free trade arrangements. China, for example, will cut tariffs from
around 24% to 9% by 2005. Tariffs on cars will drop to 25% from over 80% by 2006
143
and China is already considering looking at setting up regional trade agreements with
ASEAN countries. This will increase its exports and has the potential to assist with
improved economic performance in the ASEAN region. This could be a bonus for
resource-based exporters well positioned to satisfy an increasing resource demand in the
Asian market. Later sections examine the impact of lower tariffs and increased foreign
investment in automobile manufacturing in China which increase steel demand.
5.1 China’s International Trade
A country’s balance of payments (imports less exports) is a common measure of
economic health. Consistent surplus would suggest the government has a sound control
of the economy. Chart 5.1, shows import and export performance of China since 1981.
Up to 1995, its performance was good with an export value of US$148.5 billion after
which export performance increased steadily to US$195 billion in 1999, subsequently
rapidly growing to US$371 billion in 2002. This recent performance with 150%
increase from 1995 to 2002 has been excellent. From 1995 to 2002, imports increased
from US$132 to US$274.3 billion (108% increase). This performance is particularly
significant when one considers that during these years, much of China’s imports have
been used to “add value” to the country’s productive capacity – for example aircraft,
steel making and factory machine tools. Refer to Appendix 9.15 – Top Eleven Import
Commodities, 2000 and 2001. Steel is ranked at 3rd at US$8.96 billion and Iron ore is
ranked at 11th at US$2.5 billion. All of the top eleven imports have significant value
adding potential.
144
Chart 5.1: China's International Trade, 1981-2002
Data source: Asian Development Bank
China has come a long way since 1980 when it held 28th ranking in merchandise exports
with value US$18.139 billion. In 1990, it was ranked 14th with US$62.760 billion in
merchandise exports. In the 10 years between 1980 and 1990 the country increased
merchandised exports by US$44.621 billion averaging US$ 4.46 billion per annum.
Between 1990 and 2000 it increased merchandised exports by US$213.482 billion,
which is an average increase of US$ 21.35 billion per year. Finally, between 2000 and
2002 exports increased by a large US$122.228 billion, of which US$105.283 billion
was between 2001 and 2002. Can this sound performance continue? According to Pu
Yonghao (cited in Kynge 2001a), foreign trade is expected to double to more than
US$1,000 billion by 2006, exports growing by 15 percent from 2002 to 2006 with
foreign direct investment growing by 16 per cent annually from 2002 to 2006 reaching
around US$100 billion in 2006. This research supports this, but points out that after the
2008 Beijing Olympics, pressure resulting from currency appreciation and social issues
0
50,000
100,000
150,000
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400,000
1981
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Mill
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Exports Imports
145
may have an adverse affect on trade growth. According to the People’s Daily (2001a),
the global economic recession which started in the latter part of the 1990’s will lower
China's exports and forecasts that China's growth rate for imports will outstrip that for
exports during the first several years following accession to the World Trade
Organisation. This is a major reason why it is unlikely China would support its currency
appreciating in value.
Trade performance in relation to GDP is shown in Chart 5.2. In 2002, exports
accounted for 26.3% of GDP and imports accounted for 23.9%. Since the 1980s trade
performance has been good, only experiencing a slowdown in 1993 as a result of the
Asian financial crisis. A large component of the country’s GDP growth has been
government expenditure. Chart 5.2 indicates a slowing of the rate of increase for both
imports and exports. With improved infrastructure and enhanced value added
production capacity, it is likely that as the world emerges from the current economic
slowdown, China will be well prepared to increase exports, but its population’s
increasing appetite for western goods may need addressing. The Chinese government is
intent on developing and sustaining healthy export trading. According to the People’s
Daily (2001b), measures are already in place to boost foreign trade. These include:
faster and higher duty refund rates, simplified customs and tariff procedures. China will
also need to manage the level of its exchange rate. A higher valued yuan will not help
exports, but will help lower the cost of importing value adding machinery. This will be
a timing control matter for the Central Government to get correct. Prospective traders
with China need to be aware of this (see the section on China’s currency, section 5.8.1).
146
Chart 5.2: China's International Trade as % GDP, 1981-2002
Data source: Asian Development Bank
In relation to global trade, as mentioned earlier, China’s total exports have moved from
30th place in 1979 in the world export table to 6th place in 2002. During the same period,
imports moved from 21st place to 6th place. Tables 5.1 and 5.2 show the leading
exporters and importers in world merchandise trade in 2000 and 2001 respectively.
Between 2000 and 2001, China slipped from 5th to 6th place in the world’s export
ranking and moved up from 8th to 6th place in the world’s import rankings. If we had
included the values for Hong Kong, in 2001 we would have seen China moving to 3rd
place in both export and import rankings.
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Perc
enta
geExports/GDP Imports/GDP
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Table 5.1: Leading Importers & Exporters in World Merchandise Trade, 2000
Rank Exporters Value (Billion US dollars)
% Share Importers Value
(Billion US dollars) %
Share 1 United States 771.991 12.13 United States 1,238.200 18.56 2 Germany 548.785 8.62 Germany 500.278 7.50 3 Japan 477.929 7.51 Japan 377.012 5.65
4 France 323. 885 5.09 United Kingdom 375.389 5.63
5 China 276.242 4.34 France 332.189 4.98
6 United Kingdom 275.555 4.33 Canada 262.721 3.94
7 Canada 275.183 4.32 Italy 235.280 3.53 8 Italy 236.569 3.72 China 224.688 3.37 9 Netherlands 229.741 3.61 Netherlands 215.716 3.23 10 Hong Kong 196.890 3.09 Hong Kong 215.485 3.23
World Total Export = US$6,364bn World Total Import = US$6,670.4bn
Data source: Data-Department of Foreign Affairs and Trade, 2002
Table 5.2: Leading Importers & Exporters in World Merchandise Trade, 2001
Rank Exporters Value (Billion US dollars)
% Share Importers Value
(Billion US dollars) %
Share 1 United States 730.8 11.9 United States 1180.2 18.3 2 Germany 570.8 9.3 Germany 492.8 7.7 3 Japan 403.5 6.6 Japan 349.1 5.4
4 France 321.8 5.2 United Kingdom 331.8 5.2
5 United Kingdom 273.1 4.4 France 325.8 5.1
6 China 266.2 4.3 China 243.6 3.8 7 Canada 259.9 4.2 Italy 232.9 3.6 8 Italy 241.1 3.9 Canada 227.2 3.5 9 Netherlands 229.5 3.7 Netherlands 207.3 3.2 10 Hong Kong, 191.1 3.1 Hong Kong, 202.0 3.1
World Total Export = US$ 6,155 billion World Total Import = US$ 6,441.3 billion
Data source: WTO International Trade Statistics, 2002, p.25.
According to the World Bank (cited in Roberts & Clifford 2002), China’s share of
world’s exports should reach 13.7% (this includes Taiwan and Hong Kong - called
Greater China) by 2007 and the combined GDP will be US$12 trillion, overtaking the
European Union. Goldman Sachs & Co Asia estimate that total exports and imports,
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excluding trade between the 3 economies will exceed US$2 trillion (cited in Roberts &
Clifford 2002). China’s performance is apparent when compared to global trade:
China’s trade increased by US$8.87 billion (1.77%) between 2000 and 2001; at the
same time, world trade decreased by US$438 billion (3.36%). The trade data in these
tables do not support the pressure being put on China by the USA to appreciate its
currency. This pressure is related directly to manufacturing export competitiveness,
resulting from China’s low cost labour and this will be examined separately.
5.1.1 China’s approach to trade Throughout early history, Chinese were regarded as a trading nation. A visit to Chinese
markets anywhere in the world, demonstrates these people’s ability to negotiate and
trade in all goods and services. The following quotation clearly illustrates a modern
view of China’s approach to trade:
“China is ready to develop trade with all countries on a basis
of equality and mutual benefit, to import advanced
technology and key equipment from abroad, to draw on
foreign management experience, and to make use of foreign
funds - all for the purpose of speeding up China’s
modernisation” (Zhao 1984, pp.24-25).
Now with China in the WTO, it is widely believed that in relation to how it conducts
trade China will clash with many of its trading partners (Leggett 2001). Although this
is not official government policy, the media reports are strongly reporting such
viewpoints. This research has not found evidence of such need for China’s trading
149
partners to be “clashing” or having major trade conflicts even considering that China
ranks first in the world for anti - dumping suits, with more than 450 suits lodged against
its products (O’Neill 21 November 2001a). This issue appears to be more to do with
China’s lower labour costs which are giving it a comparative advantage rather than
some strategy that China has in place to cause difficulty with its trading partners. In
fact, this research has found evidence of unnecessary “China bashing” in that many
countries are claiming China is harming their trade, with this being due to its artificially
low exchange rate. The same countries were not complaining when China’s currency
was held firm during the Asian economic crisis and was considered overvalued. China
maintained its peg to the US currency at that time like it is continuing to do now.
According to Kynge (2001b, p.7), the European Union’s trade commissioner, Pascal
Lamy, recommended discreet discussions in preference to litigation and confrontation.
On the issue of steel trading, he expresses concerns that the United States are very
likely to take a tough stance on imported steel which is hurting domestic manufacturers.
This has the potential to be a big issue not only for China, but many other international
steel suppliers. In 2001, the USA was the world’s largest importer of steel with imports
totalling 27.8 million tonnes; China was second with 25.6 million tonnes (IISI 2003b,
p.11)30. Imposing tariffs in steel imports will impact steel producers exporting to the
USA while at the same time will help the domestic industry in as much as it will enable
domestic producers to sell more products within the USA. The problem with such
tariffs is that they distort the market. This will lead to higher steel prices for goods
manufactured in the USA and increase costs to consumers of manufactured goods both
30 By the end of 2003, China’s steel imports are forecast to exceed 31million tonnes, making it the world’s leading steel importer (CEIS 1118 2003, art.34).
150
domestically and internationally. This will inevitably lead to lowering USA producers’
competitive position in those goods. This issue is discussed under tariffs.
5.2 Trade with Japan and the USA
Charts 5.3 and 5.4 show China’s historical export and import values for USA and Japan
compared to total values. This analysis is useful in helping determining trade potential
and gives an idea of the magnitude of trade opportunities that exist. China’s export
trade to both Japan and the USA is growing faster than its import trade with them. The
resulting growing trade imbalance with the USA is causing concern with the US
government. King and Wonacott (2002) report that the trade imbalance reached an all
time monthly high of $10.8 billion in August 2002, for the whole year it totalled
US$44.5 billion (China exports to USA were US$69.95 billion, imports from USA were
US$25.506 billion). A detailed breakdown of trade with USA, as reported by the China
Economic Information Service, is shown in Appendices 9.10 and 9.11.
151
Chart 5.3: China's Export Values to Japan and USA, 1981-2002
Data source: Asian Development Bank, China Customs
In 2002, China’s exports to Japan of US$53 billion outstripped exports from the USA to
Japan for the first time. This is a good indication of the extent to which China’s foreign
trade has grown and why the USA is showing so much concern.
Chart 5.4: China's Import Values from Japan and USA, 1981-2002
Data source: Asian Development Bank
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Mill
ion
US$
China TotalTo USATo Japan
0
50,000
100,000
150,000
200,000
250,000
300,000
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
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2001
2002
Mill
ion
US$
China TotalFrom USAFrom Japan
152
According to Roston and Fonda (2002), China’s share of world exports could reach
6.8% by 200531. The Asian Development Bank (2001a), reports that as a result of WTO
entry and the associated easing of trade restrictions, imports will continue to grow faster
than exports in the next few years. According to AME Mineral Economics (July 2001),
the Chinese say that WTO entry will boost their GDP by 2–3% annually. The US
International Trade Commission estimates that the Chinese economy could expand by
4% as a result of WTO membership. This flows from efficiency gains as a result of
freeing up foreign investment.
5.3 China’s Future Trade Outlook - Factors Inputs and Efficiency
The Minister of the State Economic and Trade Commission (SETC), Li Rongrong,
outlined the major tasks necessary to achieve 9% industrial growth in 2002: “san gai, yi
jiaqiang” refers to reform, reorganisation, transformation, and strengthening
management. In general, the objectives for economics and trade in 2002 (People’s
Daily, 2001c) were for growth rates of:
• 9 percent in industrial added value
• 10 percent investment in technical renovation and
• Around 10 percent in total volume of social consumer goods’ retail sales.
With particular interest in industrial value as this relates to steel and subsequently trade,
a recent review of China’s 2002 performance shows that growth in industrial added
value was well in excess of Li Rongrong’s 9 % forecast. In fact, according to National
Bureau of Statistics (cited in CEIS 0217 2003), the growth has been the highest since
31 In 2001, China’s share of world’s exports was 4.3%.
153
1997. Table 5.3 shows in current prices, comparisons of the industrial value added with
value added from other sectors of the economy.
Table 5.3: Industrial Value Added Comparisons for China, 2001 and 2002
Value Added by: Dec 2002 (billion yuan)
%Change over
Dec 2001
Jan - Dec 2002
(billion yuan)
% Change over
Jan-Dec01
Industrial added value
321.60 14.9 3,148.2 12.6
Light industry 125.10 12.8 1,229.40 12.1
Heavy industry 196.50 16.8 1,918.80 13.1
State-owned and state holding enterprises 163.00 14.1 1,663.80 11.7
Collective enterprises 25.90 8.1 276.90 8.6
Cooperative enterprises 8.70 8.5 84.70 10.5
Joint-stock enterprises 122.90 18.1 1,157.00 14.4
Enterprises foreign funded 83.50 18.0 809.10 13.3
Data source: National Bureau of Statistics, cited in CEIS 0217 2003, art.039.
A full breakdown of industrial value added by region is shown in Appendix 9.5.7.
5.3.1 How China develops trading strategy – Buying and Selling
Unlike Japan and Korea, China tends to trade at the factory level rather than have large
trading groups. In Japan, these large trading groups are known as sogo sosha. These
are very experienced trading companies which use their large trading tonnages to obtain
maximum leverage in negotiations. The approach has been very successful in both
Japan and Korea. It seems Chinese culture prefers this to be performed within the
154
producer units. This can be considered a loss of strategic advantage to Chinese industry
when faced with trading with only a few global iron ore suppliers. This is an area of
opportunity for China and is an important finding that is discussed in more detail in
Chapter 6.
5.3.2 Olympics 2008 and Shanghai World Fair 2010 It has been reported that Beijing city would spend US$21.69 billion (180 billion yuan)
upgrading infrastructure, municipal facilities and improving the environment in advance
of the Olympics (AsiaPulse 2001). Wang Ying (2001) estimates the Olympics is worth
US$500 million in trade and investment and several billion dollars more in follow-up.
Steel and iron ore will be one of the most important commodities they will need for the
new infrastructure and sports facilities. This will increase the demand for iron and steel
over the next 5 to 7 years. According to the China Economic Information Service
(CEIS 0818 2003, art.034), it is estimated that more than three million tonnes of steel
will be needed for the 280 billion yuan of Olympic construction projects and the 100
billion yuan worth of infrastructure projects. China’s steel companies are keen to win
the majority of this business. The Deputy President of the China Iron and Steel
Association (CISA), Luo Bingsheng believes that China’s domestic steel companies are
capable of providing at least 90 percent of the building steel materials needed for the
event. However, foreign companies are also keen to secure an increased share of the
business. Refer to Appendix 9.12 for further details of Olympics projects.
China has also been successful in securing the 2010 World Expo. It will be held in
Shanghai from May through to October 2010. The project will require the construction
155
of a new Exhibition Centre and other supporting infrastructure in the region. According
to the China Economic Information Service (CEIS 0212 2003, art.033), “the planned
area for the World Expo is 400 hectares and the direct investment involved will top
three billion dollars”. The CEIS also reports “that by 2010, the city aims to have two
international airports, two railway stations, nearly 20 international container sea routes
reaching more than 400 ports in more than 160 countries and regions, seven tunnels
across the Huangpu River, six bridges, three ring roads, nearly 400 km of railway tracks
and a number of passenger transport hubs around the exhibition area”.
The multiplier effects of the Olympics and World Expo will lead to more infrastructure
construction, create more jobs and generally continue to stimulate the economy. This
will be positive for the iron and steel industry in that it should be capable of supplying
the majority of the steel products required for these events.
5.3.3 Infrastructure development The construction of infrastructure is a large consumer of steel. The development of
China’s infrastructure is expected to continue for the short to mid term and will be a
major factor in consumption of domestic steel production and will help maintain
production levels which will enable productive efficiency and in turn competitive steel
prices. Details of the major steel consuming infrastructure developments underway in
China are:
The Three Gorges dam project on the Yangtze River started in 1994 and the expected
completion date is 2010. According to China Energy (Interfax 2003), construction of
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the dam is expected to consume 800,000 tonnes of steel and reports 600,000 tonnes
have been used to date.
Construction of the Ningbo Hangzhou Bay sea-crossing bridge (CEIS 0609 2003
art.018) started in the middle of 2003 and should be complete by 2009. The bridge will
be 36 kilometres long and will be one of the world’s longest with 6 lanes in both
directions. The cost of the project is estimated to be 11.8 billion yuan (US$1.42 billion).
The construction of this bridge is expected to considerably boost economic
development in the Yangtze River delta region. Following construction of the Ningbo
Hangzhou Bay Bridge, a number of other bridges (Bohai Bay, Huangdao in Shandong
Province and East China Sea) are being considered for construction. The costs of such
projects are estimated to be more than 100 billion yuan (US$12.09 billion).
Construction of the 1,956 kilometre long Qinghai to Tibet railway line (CEIS 0513
2003, art.013) was launched in June 2001 and is scheduled to be completed by 2007.
The project will cost around 36 billion yuan (US$4.34 billion). It involves the
construction of a 920 metres long bridge which will stretch over the Lhasa River. The
bridge is expected to be completed by 2005 and will cost approximately 100 million
yuan (US$12 million).
The above are just some examples of the infrastructure projects either planned or in
place. Construction of infrastructure also has a flow on effect to other sectors, for
example it increases domestic demand for engineering materials and equipment.
According to CEIS (0423 2003, art.032), it is estimated that the engineering machinery
industry will consume around 2.6 million tonnes of steel products over the next few
157
years. With the outlook for increased steel demand, such activity is good for the steel
industry, particularly as China’s steel industry is more suited to producing steel
products for construction of railroads, bridges and for reinforcing concrete.
5.4 Free Trade and Tariffs
The nature of trade is such that free trade and associated tariff reductions will never
fully eliminate trade tensions. This is because traders will be likely to devise other
ways to either tilt playing fields in their favour or level what they consider are tilted
playing fields working against them. This very often emerges as anti-dumping
arguments, common in the international trade of iron and steel, which has had its share
of disputes and tensions. This is evidenced by high numbers of dumping32 claims being
made which in turn has led to steel producing countries introducing trade protection
measures which are not conducive to a free trade culture.
In March 2002, the US surprised many by introducing protective measures in an attempt
to protect its iron and steel industry by imposing tariffs up to 30% on imported steel
from Europe, Asia and South America. Subsequently, in an interim WTO ruling in
March 2002 and then in July 2003, these were found to violate WTO trade rules. The
United States appealed against this ruling (Meller 2003) and in a final verdict the
Appellate Body upheld the earlier decision of a panel of trade judges that the tariffs
were “inconsistent” with trading regulations (Bloomberg News 2003).
32 This is selling low priced and usually subsidised goods into another market, where the sale has the potential to damage the local industry or market.
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China, the European Union, Japan, the Republic of Korea, Switzerland, Norway, New
Zealand and Brazil vehemently opposed the tariff increases. China subsequently took
counter measures, which ironically resulted in higher domestic market prices for its
steel. This in turn put cost pressures on other industrial sectors of the economy. As
outlined earlier, the USA is the world’s largest importer of steel33 products so this
action seriously impacted all countries which export steel. However, just prior to the
deadline set by the WTO, the USA withdrew its tariffs without any damage being
caused. Its strategy gave the country’s steelmakers almost 2 years protection during a
period when the dollar also depreciated and went a long way in assisting the industry
restructure and consolidate.
As part of its WTO commitments, China undertook to lower its average tariff level to
10% by 2005 (CEIS 0212 2003, art.041). During 2002, China lowered its tariff levels
from 15.3% to 12% then on 1 January 2003, this was followed by a further reduction to
11%. More than 3,000 taxable items have had their tariff rates reduced. As at early
2003, the world’s nominal tariff rate is around 3.8%, China’s tariff rates for industrial
products and agricultural products have dropped by 7.2% and 9.6% respectively.
According to Pu Haiqing, director of the State Administration of the Metallurgical
Industry (SAMI) (cited in China Metal Markets Iron & Steel Monthly, 16 October
2000, p.2) China will cut its tariffs on steel imports within the first five years after it
joins the WTO. Tariffs in general will need to be cut from around 24% to 9% by 2005.
Table 5.4 shows examples of large reductions that China has been making in complying
with its WTO obligations. The rate shown for MFN34 is the rate that will apply to
member countries of the WTO; the general duty rate applies to all other countries with
33 China will likely be the world’s leading steel importer by the end of 2003 with imports exceeding 31million tonnes (CEIS 1118 2003, art.34).
159
the exception of those included in the Bangkok Agreement. For a comprehensive list of
tariffs reductions that relate to iron and steel products, refer to Appendix 9.17.
Table 5.4: Examples of Tariff Reductions35 Following China’s Joining the WTO
Import Duty Rate Tariff Number Description of Goods M.F.N % Gen. %
8702.1093 With 10 seats or more, but not exceeding19 seats 40 230
8703.2339 a cylinder of capacity exceeding 3000 cc:
38.2 270
8703.2430 Saloon cars 43 270
Data source: The Customs General Administration of the P.R.C (cited in CEIS 0403 2003, art.022)
8519.1000 Coin-or disc-operated record player 30 130
8519.2100 Other record players without loudspeaker
30 130
8519.3100 Turntables (record decks with automatic record
30 130
8520.3210 Digital audio Cassette-type 30 130 Data source: The Customs General Administration of the P.R.C (cited in CEIS 0331 2003, item
10, art.032)
Excess global capacity in the steel industry has led to steel producing countries seeking
protection. In the long run, reduction in global capacity is required if it is to move
towards economic efficiency. Unfortunately, market forces will cause less efficient
steel producers to either merge or go out of business. Even while faced with global
excess capacity, China forges ahead and increases capacity.
34 MFN refers to Most Favoured Nation. 35 These tariff reductions took effect on 1st January, 2003.
160
This in turn puts more pressure on other countries. Although China is consuming the
majority of the steel that is produced domestically, the country actually will still become
the world’s largest steel importer in 2003. The country’s increasing capacity reduces
the need for dependence on other countries and enables resources to be employed
locally to produce the nation’s steel demands. In China’s situation, without a strong
steel industry, the country could not have afforded to import all the iron and steel
required to enable its industrialisation and modernisation programme. China’s steel
production ability when it focuses on the international market for its sales will put even
greater pressure on those other countries whose industries are not as competitive as
China’s.
According to Jonquieres (2002), governments of steel producing nations belonging to
member countries of the Organisation for Economic Co-operation and Development
and seven other countries including China agreed to accelerate closure of surplus steel
capacity by 140 million tonnes by 2005 and at the same time would work together to cut
subsidies that are distorting international steel trade. Government subsidies such as tax
breaks and low interest loans have added to an excess capacity of about 200 million
tonnes (Bloomberg, cited in Today, Business News 2003, p.12).
Interest in regional free trade agreements (FTAs) is increasing, especially in the Asia-
Pacific region. In the absence of a new round of negotiations in the World Trade
Organisation, this trend is likely to continue. Free trade agreements can be an effective
means for dealing with some of the challenges of globalisation, as they offer a vehicle
for promoting closer regional ties and greater trade liberalisation. In November 2002,
the Association of South East Asia Nations signed an agreement for member countries
161
to work towards a free trade agreement by 2010. According to Wright (2002), as a
result of the increased competition, backlash towards an agreement with China is
growing within the ASEAN member countries. The Trade Ministry in Indonesia is
considering talks of tariff increases on China’s competitive garment trade. This appears
to be more evidence of a trend towards “China bashing” where it seems China trade is
criticised for being competitive. The USA tried the same in relation to steel. This is
occurring at a time when China is complying with its commitment to the WTO to
reduce its own tariffs, promoting free trade and actually setting up free trade agreements
in the region. Mihui (2002) reports that Korea’s Ministry of Agriculture and Forestry
and Ministry of Commerce, Industry & Energy are examining the feasibility of a free
trade agreement between China and Korea.
Tadao Chino, the Asian Development Bank’s president (cited in Luce 2002) supports
Jiang Zemin’s proposal to create a free trade area between the Association of Southeast
Asian Nations (ASEAN) and China. This would help reduce China’s dependence on
the USA market for its trade. This initiative was subsequently progressed and the 10
ASEAN members have agreed with Beijing on a long list of agricultural products on
which tariffs will be reduced from 1st January 2004, with the newer members
(Cambodia, Laos, Myanmar and Vietnam) having an extra three to four years to reform
tariff rates (Wain 2002).
The most significant trade agreement milestones for China have been with the European
Union and the USA. Features of China’s agreement with the European Union are:
162
• China ceasing to apply a number of measures that distort trade and have
macroeconomic effects, including export performance, local content
requirements, and industrial export subsidies
• China's government procurement system will become more transparent, and will
not discriminate between foreign bidders
• The approval thresholds of provincial authorities in some manufacturing sectors
will be raised from US$30million to US$150million
• Reduced import tariffs on over 150 leading European exports (South China
Morning Post, 23 May 2000).
Features of the negotiations with USA are:
• China reducing tariffs on automobiles from between 80 and 100 per cent to 25
per cent by 2006. Automobile spare parts tariffs cut to an average of 10 % by
mid-2006
• WTO rules bar quotas and other restrictions. China has agreed to eliminate these
restrictions over a five-year period
• Auto quotas will be phased out by 2005. In the interim, the base-level quota will
be US$6 billion (the level prior to China's automobile industrial policy)
• Trading rights and distribution services to be progressively phased in over three
years. China will also open up sectors related to distribution services (Laprès
2000).
Multilateral negotiations offer the best way to achieve market access gains and secure
more favourable trading conditions for exporters, which in turn can lead to economic
benefits for participating countries. A range of factors motivates FTAs, including:
163
• A desire by countries to gain maximum short-term trading advantages in
advance of a WTO round
• An attempt to capture strategic advantages from establishing closer links
between particular countries and
• An interest to trial liberalisation in a smaller, less threatening environment than
the multilateral one.
According to the WTO (2003, p.10), removal of trade barriers could result in welfare
gains of between US$250 to US$620 billion.
As a result of Japanese and Korean steel producers allegedly dumping36 steel products
onto the Chinese market, the Ministry of Foreign Trade and Economic Co-operation
(MOFTEC) announced its final verdict on its anti-dumping case against Japanese and
South Korean cold-rolled stainless steel sheet. The anti-dumping tariffs will be
effective for five years from April 13, 2000, when the ministry made its initial judgment
on the case, according to a press release from MOFTEC. These details are shown in
Table 5.5.
36 This is selling products into a market at subsidised prices.
164
Table 5.5: Anti-dumping Tariffs applying to Japanese and Korean Companies
Company Anti-dumping tariff
Japanese companies
Nippon Steel Co., Ltd 24%
Nippon Metal Industry Co., Ltd 26%
Nisshin Steel Co., Ltd 17%
Sumitomo Metal Industries, Ltd 26%
Yakin Kogyo Co 27%
Nippon Kinzokuco Ltd 58%
Takasago Tekkok. K 58%
NAS Stainless Steel Strip MFG
Co., Ltd
58%
Other Japanese Companies 58%
South Korean companies 57%
Data source: China Metal Market Iron & Steel Monthly, 15 January 2001, p.10
This is a strategic measure by the Chinese government aimed at ensuring China’s steel
producers do not suffer as a result of Japanese and Korean subsidised steel being sold in
the country. As China is not a major exporter of steel, it will not suffer retaliatory
tariffs being imposed on its steel products. It is a move that ensures domestic demand
for steel in China is satisfied by domestic production.
In response to the USA introducing tariffs on steel imports, China’s Foreign Trade &
Economic Cooperation Ministry imposed “Safeguard Measure” tariffs on five types of
steel imports for the next 3 years (MOFTEC 2002). These commenced on 20
165
November 2002 and will continue in place until 23 May 2005. According to Delaney
(2003), China’s response measures helped Baoshan Steel by contributing to an
increased profit of 1.7 billion yuan and at the same time keeping out competitive
imports giving Baoshan time to upgrade its production facilities. However, China’s
increased tariffs were not welcomed by all of Chinese industry, which complained that
the protective measures were causing many of their manufactured goods to increase in
price. Consequently, in China like other countries governments introducing measures
to help their steel industry leads to increases in raw material costs for other
manufacturers. These measures help one sector, but hurt others and in the longer term
fail. The Chinese government subsequently introduced substantial exemptions to these
safeguard measures (Kynge 2003a, p7).
5.5 World Trade Organisation (WTO) Entry
Following World War Two, the concept of global trading emerged when the General
Agreement on Tariffs and Trade (GATT) was established. After the Uruguay Round
negotiations, GATT was replaced by the World Trade Organisation (WTO) on 1
January 1995. At this time, membership was 128 countries (the 128 countries that had
signed GATT by 1994 2003) and as of 4 April 2003, this has subsequently grown in
strength to 146 countries (Understanding the WTO: The Organisation – Members and
Observers 2003). Now one of the world’s largest and most diversified markets, China,
became a member of WTO after a Ministerial meeting in Qatar in November 2001.
To gain entry to the WTO, China had to clear many obstacles. The country had to
negotiate bilateral agreements with a total of 37 WTO members and still needs to
complete negotiations with: Costa Rica, Ecuador, Guatemala, Mexico, and Switzerland.
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It also still has to finalise the Protocol of Accession (POA) package with the WTO
working party. This package includes the final, legally binding terms and conditions of
China's membership. Members of the WTO need to grant fellow members a “most-
favoured-nation” (MFN) status. This means they must provide all members with the
same favourable trade privileges. In the USA, this is referred to as Permanent Normal
Trade Relations (PNTR). Trade between member countries requires China to reduce
trade barriers. For example, tariffs will need to be cut from around 24% to 9% by 2005.
This research found that China was in the process of complying with its WTO
obligations.
Effect on metal demand
Chinese officials expect more foreign investment in China together with more joint
ventures. There are two reasons for this, because of the size of the market for goods and
services and to tap into the low cost of labour and other factor inputs of manufacturing.
Chandler (2001) suggested the rates of increase of foreign investments seen in 2001
have the potential to add a full percentage point to China's annual economic growth.
This increased foreign investment drives economic activity, creates more jobs and this
gives people more money to either spend or invest. In a country that has had limited
access to luxury goods, increased economic activity and money supply increases
demand for houses and goods, both of which require large amounts of steel. As long as
a nation has steel productive capacity in place, it does not have to damage its balance of
payments by having to import expensive steel for manufacture or construction. Having
steel productive capacity also means that China can add value to the basic inputs and
also export these goods to other countries and generate national income.
167
It is generally believed that as foreign investment increases in China, both technical and
managerial expertise will go to there. This occurs as companies send their professional
staff to the country to manage their investments. It leads to transfer of knowledge and
skills to local staff, which in turn leads to more efficient use of China’s economic
resources. Through increased exports of value adding goods, a more efficient China
also stimulates internal demand.
The ABARE (2002c) reports that membership of WTO will give China greater access to
foreign capital and technology, which as outlined above will modernise its industrial
capacity and enhance its competitive position even further. This together with removal
of trade barriers as prescribed by the WTO will help China, particularly since it is so
competitive with its lower labour costs. This is very positive for the nation’s iron and
steel industry which the government put solidly in place to industrialise and modernise
the nation and should help ensure its economic growth and integrity can be sustained.
Effect on the Economy
According to the Zhu Qiwen (cited in China Business Weekly 2001), “the proven
willingness of the Chinese authorities to incur substantial short-term economic costs in
the pursuit of long-term economic gains is a measure of the depth of their commitment
to reform and opening up.” China’s Premier, Zhu Rongji (quoted in China Business
Daily Update, 4 July 2001) forecasts that the economy would grow by seven percent a
year between 2001 and 2005 and would double in size from US$1.08 trillion in 2000.
He made it clear his Government recognises the challenge facing China due to the
competitive threat from entry to the WTO. His views support earlier comments by the
168
Chinese President Jiang Zemin that globalisation was a "two-edged sword", and "to a
developing country, it holds opportunity as well as risk" (Reuters 2001a).
Zhao Jinping (China Daily 20 July 2001) states that sustainable economic development
will demand more foreign capital and to maintain the planned 7-8 per cent growth rate
during the 10th Five-Year Plan (2001-2005), China will need to absorb around US$250
billion of foreign investment. According to Hu Zuliu (2000), China’s entry to the WTO
would raise annual foreign direct investment (FDI) inflows to US$100 billion by 2005
and add half a percentage point to the annual gross domestic product growth rate.
The Asian Development Bank (2001b), reports that as a result of WTO entry and the
associated easing of trade restrictions, imports will continue to grow faster than exports
in the next few years. According to AME Mineral Economics (July 2001), the Chinese
say that WTO entry will boost GDP by 2–3% annually, translating into five million jobs
for each percentage point. The US International Trade Commission estimates that the
Chinese economy would expand by 4% as a result of WTO membership. This would
flow from efficiency gains from freeing up foreign investment. China’s entry to the
WTO is causing concern to other Asian economies. In relation to heavy industries such
as the petrochemicals, shipbuilding, and automobile industries, China has the potential
to equal the Republic of Korea within the next decade. In terms of efficiency
improvements, we are already seeing:
• A reorganised domestic shipbuilding industry
• Formation of strategic alliances between the Baoshan, Shoudou and Wuhan
Steel Corporations (Yoo 2001).
169
While the Chinese Government continues to drive these efficiency improvements, the
rest of Asia will be watching carefully.
Lardy (2002) points out that China made service level commitments that other countries
will use to limit Chinese imports. An example of these commitments is the transitional
product safeguard clause, which will be in place until 2013. This enables member
countries to limit imports, a safeguard to allow member countries to impose quotas on
imported Chinese clothing until end of 2008 and discriminatory WTO terms in relation
to anti-dumping cases. According to Wu Jianzhong (cited in Hsieh 2002, p.A3), local
governments in China are liberalising much faster than required under the WTO
Agreement – not taking advantage of a 3 year grace period after which time, foreign
companies should have a more “level playing field”. There is also concern that China
with its large and growing production capacity entering the WTO together with world
trade barriers being removed and the world’s excess production capacity will add
further pressure to the deflationary conditions, which are emerging globally (Pfanner
2002). This deflationary pressure may in turn impact on world commodity prices, as
outlined in the section on money supply, which examined the effects of China’s money
supply increasing. This showed how deflationary pressure is lowered as increasing
money supply causes inflationary pressures. Although, the lower costs of Chinese
manufactured goods when exported are still causing deflation fears in other countries.
The WTO is to eliminate tariffs and level the playing field for international trade, but it
will not get involved in many of the issues that are troubling China such as currency and
non-performing loans, so its impact will be limited to tariff related issues which in many
ways will tend to help China more than it may harm it.
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5.6 Foreign Trade Policy
According to the China Metal Market Iron and Steel Monthly (16 October, 2000, p.1),
the Chinese government plans to make changes to the trading policies for steel after
entry into the WTO. Currently, foreign trade policies support export and at the same
time encourage minimising imports. The policies affected are: setting limits to the
imports of steel products and appointing a certain enterprises to trade steel. These
methods should enable China to better manage and control steel trade in the future.
In what appears to be an attempt at addressing Japan’s iron and steel industry’s
competitive position, which has been losing ground to China, Japanese trading
companies, Itochu Corporation and Marubeni Corporation are in the final stages of
negotiations to integrate their steel divisions to boost competitiveness. In addition, the
Metal Bulletin (29 January 2001) reports Japanese steel traders Mitsubishi Corporation
and Nissho Iwai announced that, after nearly a year of discussions, they have decided to
formally begin investigating the feasibility of an across-the-board consolidation of their
domestic and overseas steel trading divisions. When finalised, this would create the
largest steel trading firm in Japan and among the largest in the world. It would create a
company controlling 30% of Japan's domestic steel trading business and 19% of all
exports (Agence France-Presse, cited in Dow Jones, 19 October 2000). According to
Dow Jones Newswires (2001), Sumitomo is reported to be considering tie-ups with
Nippon Steel which had already announced a similar alliance with Kobe Steel and
Kawasaki Steel Corporation is planning an alliance with NKK Corporation.
Matthews (2002) reports due to the increased demand for steel, China’s steelmakers
have had to form foreign partnerships. For example, Thyssen Krupp AG of Germany
171
and Anshan Steel & Iron Company are forming a galvanised sheet steel joint venture for
automobiles. Honda of Japan is one of the first foreign companies to be granted
permission to control an automotive joint venture with several China automotive
companies. According to Dow Jones, the venture is worth US$193 million and is
scheduled to start production in 2004 (cited in the Asian Wall Street Journal, 2002,
p.M2). The booming steel market in China is attracting major European steel
companies. Thyssen Krupp (Germany) is planning to invest US$141 million over two
years on processing plants to produce steel for the automobile industry and Arcelor
(Luxembourg) will be spending US$118 million in a joint venture in Shanghai with
Baosteel and Nippon Steel (Marsh 2003b, p.16). These trends are important findings in
that they are suggesting a relocation of potential steel production from Europe to China.
This is positive for Australian iron ore producers who are considering major capital
expansions and for China in that it improves China’s ability to produce flat sheet
products for the value adding manufacturing sector.
Rather than incur high shipping transport costs for the iron ore then to transport steel to
international markets, we are likely to see China investing more overseas. Baosteel has
already begun this by doing a feasibility study for a 3.5 million tonne per year slab mill
with Brazil’s large iron ore supplier CVRD. The iron ore would come from CVRD’s
Carajas mine and Baosteel would export the steel slabs (CRU 2003b, p.10).
5.6.1 Foreign Investment in China
The Chinese government is aware of the importance of the need for increased foreign
investment in order to sustain economic development while at the same time, inefficient
state owned enterprises (SOEs) are being restructured and many Chinese workers are
being made redundant. Chart 5.5, gives foreign investment in China from 1988 through
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to 2002. This shows rapid increase in the early 1990s with lower rate of increase
through the rest of the 1990s, the Asian economic crisis in the latter part of 1990s
causing lower investment, with increases returning in 2000 and continuing.
Chart 5.5: Foreign Investment in China, 1988-2002
Data source: Asian Development Bank – Regional tables
According to the Governor of China’s Central Bank, Dai Xianglong (cited in Business
Week 2001) US$45 billion per year of foreign investment is expected for the next five
years. With the interest foreign companies have to increase their presence in China,
foreign investment should exceed the Governor’s expectations. This is good news for
steel demand and China’s continuing sound economic performance.
Analysts estimate foreign investment in China could accelerate sharply to between
US$60 billion and US$65 billion in 2005 from around the 2001 value of just over
US$50 billion. Some of this is likely to come at the expense of potential investment in
the rest of the Asian region (China Securities Bulletin 2001). The importance of foreign
Chart 5.8: Foreign Funds used for Fixed Asset Investment in China, 1981-2001
Data sources: Data up to 2000, China Statistical Yearbook 2001,
2001 data - China Statistical Yearbook 2002, p177
According to UNCTAD’s 38 World Investment Report 2002 (Sept, 2002), between 2000
and 2001, global foreign direct investment (FDI) inflows declined 51% from
US$1,491,934 million to US$735,146 and FDI outflows declined 55% from
US$1,379,493 million to US$620,713. At the same time, China’s FDI inflows
increased 15% from US$40,722 million to US$46,846 million and its outflows
increased 94% from US$916 million to US$1,775million. Further declines in World
FDI are being forecast for 2002. Table 5.6, compares the changes in global versus
China’s FDI from 1980 through 2001.
38 United Nations Conference on Trade and Development. Established in 1964, UNCTAD aims at the development and friendly integration of developing countries into the world economy.
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Mill
ion
US$
177
Table 5.6: Comparison of the World and China Foreign Direct Investment Inflows, 1980-2001
US$ million 1980 1985 1990 1995 2000 2001
World 54,945 57,596 202,782 330,516 1,491,934 735,146
China 57 1,659 3,487 35,849 40,772 46,846
% World 0.104% 2.88% 1.72% 10.85% 2.73% 6.37%
Data source: UNCTAD, 2002
The increasing FDI funds into China, at a time of slower global economic activity, are
being driven by China’s economic reform which has been further enhanced by China’s
entry to the WTO. China’s gain is at the expense (and of much concern) of its Asian
neighbours. Between 2000 and 2001, FDI inflows for Hong Kong, Malaysia and
Republic of Korea reduced from US$61,938 million to US$22,834, US$3,788 to
US$554, and US$9,283 to US$3,198 respectively (UNCTAD 2002). The increasing
foreign investment together with China’s increased trade performance is enabling its
merchandised exports to become more diverse. We have discussed earlier even with its
steel industry growing and contributing to its GDP, the significance of steel production
on GDP has in fact decreased. This supports the maturing of China’s industrial sector –
further evidence of the country’s trade diversity is apparent in the section on Australian
trade, where large trade exports of clothes and toys occurred. According to The Bank
of China, FDI is boosting productivity by 4% annually (cited in Clifford 2002, p.25).
Chart 5.9 shows how industrial activity, which includes mining, manufacturing and
public utilities, has increased compared to the other major sectors agriculture and the
public service. Foreign direct investment into China is having very little impact on
agriculture as it is mostly going directly to industrial productivity. Actual steel
178
production has lowered relative to GDP, but industrial activity has increased from 53%
in the early 1980’s to over 65% in 2002 (see Chart 3.11). Industrial activity is a major
consumer of steel, mainly in the form of sheets, tubes and plates. The Chinese steel
industry is still not meeting this demand in full as it does not have the capacity to
produce the range of sheet products required in manufacture, hence the reason for China
still being a large importer of these products. The industry sector is rapidly building
and commissioning steel processing plant capable of supplying the needs of the entire
industrial sector. This will be essential for the industry as it moves away from
government driven infrastructure steel demand to demand driven by foreign investment
in the manufacturing sectors. The section on increased automobile production and steel
demand is a good example where foreign investment is driving manufacturing in China.
Chart 5.9: Significance of Industrial Activity, 1981-2002
Data sources: Asian Development Bank, 2000, 2001, 2002 and 2003
It can be seen that large foreign investment funds are flowing into China, but are funds
flowing out? China has not traditionally invested overseas; those of Chinese origin
$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
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1995
1996
1997
1998
1999
2000
2001
2002
billi
on U
S$
Value of AgricultureTotal Industrial activ ityValue of finance, Pub admin & others
179
living in Hong Kong, Taiwan and many parts of the world have mainly done this. Table
5.7 compares foreign direct investment outflows from China to the rest of the world
between 1980 and 2001.
Table 5.7: Comparison of the World and China Foreign Direct Investment Outflows, 1980-2001
US$ million 1980 1985 1990 1995 2000 2001
World 53,674 62,163 233,315 356,404 1,379,493 620,713
China - 629 830 2,000 916 1,775
% World - 1.01% 0.356% 0.561% 0.066% 0.286%
Data source: UNCTAD, 2002
As China’s economy improves, the country is investing more in overseas projects.
Table 5.7 shows periods of higher investment outflows occurring in 1985 and 1995. An
increase for 2001 occurred and with the country keen to secure access to overseas raw
materials for example, iron ore, it is highly likely that increased investment outflows
will occur for the next few years. This will be necessary to sustain the iron and steel
industry’s viability. If China does not invest in securing future supplies, this means that
they will have less control over material price and commercial conditions. Then as
other countries in the region develop their steel industry, this will put upward pressure
on raw material prices which will make it difficult for China to achieve an adequate
share of steel exports. A large share of global export market is necessary if China’s
steel industry is to be sustained after the end of this decade when infrastructure
development will slow down. This is an important finding. Balfour (2002) estimates
that Chinese companies will spend around US$2.4 billion in overseas investments in
2002 and according to the Ministry of Foreign Trade and Economic Cooperation
180
(MOFTEC) (cited in CEIS 0218 2003), by the end of 2002, 6,960 Chinese-funded firms
had been officially established outside China and that over 160 countries and regions
received investment from China, involving contracted funds of US$9.34 billion. Some
examples of recent Chinese overseas resource related investments are shown in Table
5.8.
Table 5.8: Examples of Chinese Foreign Investment Overseas
Chinese Company Foreign company Details Value
(US$) China National Offshore Oil Corporation British Petroleum 12.5% Share of gas field in
Indonesia 275 million
China National Offshore Oil Corporation WA Government 5% stake in NW Australia 320 million
Sinopec 75% stake in African oil field 394 million
Baosteel Rio Tinto 46% stake in Iron Ore Joint Venture 66 million39
Principal source: Balfour (2002). It can be seen from Table 5.8 that China is becoming serious about energy and raw
material security. Secure access to these resources will be essential for the longer-term
state of the county’s economy.
5.7 Future of China’s Steel Industry
The importance of infrastructure development together with economic reform in driving
developments in the iron and steel industry has been shown. These aspects will
continue to have the biggest impact on iron and steel demand characteristics. This
section examines the outlook for the industry, paying particular attention to reforms and
social changes that are taking place in China. How the industry can sustain its viability
as the country changes is also discussed. This will be useful in helping potential
investors with their trading and investment aspirations.
39 At 1A$ = US$0.55 exchange rate (rate at time deal was signed).
181
5.7.1 Outlook for steel production In 200240, China accounted for 20% of the world steel production. The China
Economic Information Service (CEIS 0825 2003, art.029) reports that by 2005, China’s
production capacity of crude steel is expected to reach 270 million tonnes and exceed
330 million tonnes by 2010. The production capacity of pig iron, crude steel and steel
products of the top 40 large steel enterprises is expected to reach 177 million, 184
million and 184 million tonnes respectively by 2005. Comparing to 2002, this
represents an increase of 42%, 29% and 34% respectively. In relation to the top 40
steel producers, the top 10 would increase capacity by an average of about 24% in the
next three years, while those between 11 to 20th ranking would increase capacity by
68% on average, those between 21 to 30th ranking would increase their capacity by
about 43%. The remaining 10 producers in the top 40 list expect a 75% increase.
According to the survey, several of the major steel firms located in inland areas plan to
relocate their plants to the coastal areas. Foreign investors from overseas, mainly Japan,
Republic of Korea and Germany are involved in many of these expansion projects
(CEIS 0709 2003, art.35).
AME Mineral Economics Steel Outlook (2003) estimates that China’s steel production
will grow to 270 million tonnes by 2005 and then to 330 million tonnes by 2010. Based
on a world production of 1,000 million tonnes, this equates to China having 33% of
world production in 2010.
40 China’s steel output in 2002 was 181.6 million tonnes; world output was 897 million tonnes.
182
As outlined earlier, increased demand for steel from continued infrastructure
development together with foreign investment in industrial activity should continue to
increase demand to around 300 million tonnes, by this time world steel production
should also increase to over 1,000 million tonnes. This suggests that China’s share of
the world market should increase by around 10% to 30%. The International Iron and
Steel Institute, which estimates world steel output growth being 1.7% per year with
China’s growing at 6.7%, supports this. If we extrapolate this through to 2010 we
obtain the values shown in Table 5.9. This is an important finding.
Table 5.9: Forecast World and China Steel Output, 2003-2010.
2002
Actual 2003 2004 2005 2006 2007 2008 2009 2010
World
(million
tonnes)
897 912 928 944 960 976 992 1,009 1,027
China
(million
tonnes)
181.6 194 207 221 235 251 268 286 305
China
as %
world
20% 21% 22% 23% 25% 26% 27% 28% 30%
Data source: China Economic Information Service, (CEIS 0423 2003, art.032)
The IISI forecast in Table 5.9 is supported by the China Iron & Steel Association
(CISA) which forecasts that China will need 313 million tonnes of steel by 2010 and
further outlines how studies show that a country's steel demand is closely related to the
nation's industrialisation level, especially the development of the steel industry (CEIS
0911 2003, art.034). As China sets the goal of achieving industrialisation by 2020, its
steel industry will account for 54.9 percent of the gross domestic product in 2010. The
183
CISA also draws attention to the investment risks faced by China's iron and steel
industry, among which is a lack of iron ore resources. However, CRU International
(CRU 2002a, September, p.2) forecasts lower production tonnages such that by 2012,
world steel production will be 1,059.2 million tonnes and China’s production will only
be 231.4 million tonnes. This represents only 21.8% of the world’s output. The CRU
forecast was made before the large output increases in 2001 and 2002. A probable over
optimistic forecast is an output of 510 million tonnes per annum (China Metals 2003,
p.2) which is based on growth of 21.8% in 2004 and 2005 followed by around 7%
growth between 2006 and 2010. As discussed in Chapter 7, around this time, it is likely
that demand for construction type steel (long products) is likely to reduce. An output of
510 million tonnes would expose the industry to an over capacity situation.
In the long run (beyond 2010), China’s economic efficiency (in relation to steel
production and iron ore consumption) will be improved by continued improved
infrastructure development41. Baoshan steel and Wuhan still need to transport their
imported ore by barge 150 km and 1200 km respectively to their mills after being
offloaded at ports (SBC Warburg 1998, p21). Continued closure of many of the smaller
less efficient steel producers will also enhance efficiency. Demurger et al (2002, p.8) in
their comparison of the topography of the USA and China, outline that although both
countries are similar in size and climate, the USA has coastline on both east and west
whereas, China only has coast on its east. China is also more mountainous and hilly.
These topographical features require China to have a greater need for infrastructure
development to make internal transportation more economical. This is one reason why
in the past economic development has been relatively slow in China.
41 In order to balance raw material input supply and demand, this needs to be well managed.
184
5.7.2 Research, Development and Sustainability A China Iron and Steel Industry Association report says that large and medium-sized
steel enterprises are spending more in environmental protection, technological
renovation and research and development (CEIS 0714 2003, art.34). Zeng Peiyan,
Minister in Charge of the State Development Planning Commission, in his report on
China's national economic and social development plan delivered at the First Session of
the 10th National People's Congress on March 6, 2003 (CEIS 0321 2003, art.052)
outlined “the government would continue to implement the strategy of rejuvenating
China through science, technology and education and strategy of sustainable
development”. A report from the National Statistics Bureau, the Ministry of Science
and Technology and the Ministry of Finance (CEIS 1114 2002) outlines that that annual
expenditure in 2001 on R&D was 104.3 billion yuan. The report states that 68.4 percent
of the research and development money went to the coastal provinces and
municipalities in China, such as Shanghai, Guangdong and Shandong.
Research and development will produce longer-term benefits to industry in that
technological improvements lead to increased factor efficiencies, which in turn helps
reduce marginal costs and maintains a competitive edge in the market place. As a result
of overcapacity in the global iron and steel industry, expenditure on research and
development has generally suffered. China on the other hand has had a large focus on
development. Nevertheless, research has not been high on China steel industry’s
agenda as the country absorbs the knowledge benefits achieved by European steel
companies. In order to sustain leadership in the industry, China could be well rewarded
in its research efforts. How this research is conducted, will determine the value
obtained for the dollars expended. China has traditionally not been a big spender on
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technical research, relying mainly on its large pool of academics to carry out low cost
academic research in conjunction with foreign institutions of higher learning. Joint
ventures and working closer with Australian and Brazilian iron ore companies will
provide reliable, economic and quality supplies of iron ore. Like Japan did, China
needs to maintain a long term competitive supply market for satisfying the country’s
demand for iron ore.
China’s iron ore is low quality, so the country will need to improve beneficiation
processes or introduce further downstream processing of its own iron ore. This may
involve joint ventures with western companies. In the longer term (or when cost of
importing ore becomes too expensive) it is likely, that China’s iron and steel industry
will move into more beneficiation and downstream processing. This will ensure more
efficient use of its low-grade ore deposits. When international trading conditions lead
to higher iron ore prices, one can expect to see the emergence of several joint ventures
and increased development of facilities for pellet, direct reduced iron (DRI) and hot
briquette iron production (HBI). In 2002, world production of DRI/HBI was 45.08
million tonnes (Midrex 2002) and in 2002, China’s consumption of DRI was 1,298
thousand tonnes (China Specific 2002, p.11), this represented 2.88% of world DRI/HBI
production. Depending on the development of mini steelmills, availability and the price
of scrap (major variables in the use of DRI /HBI products); the next decade should see
China’s consumption of these products increase.
Tindale (1997) suggests the optimum efficiencies will occur in the Chinese steel
industry when excessive investments in overcapacity are addressed and more focus on
quality management and worker expertise is achieved. This will require closing steel
186
producing plants, which are not geographically positioned for ease of access to ports or
at least economic rail transport. Steel plants with lower efficiency usually associated
with older equipment should also be closed. Focus on training of management,
technicians and workers will become more important as China changes its focus from
satisfying domestic demand to exporting. As outlined earlier, entry to the World Trade
Organisation should also drive growth through the reductions in tariffs and trade
barriers.
With continued economic development, how does and how will China compare with the
international competition? Brizendine and Oliver (2001) believe China’s steel industry
is not in good shape with many of the steel producers being inefficient in that they do
not use resources efficiently and that most of them require government protection. This
may be the case for many of the smaller mills, but this is changing. The larger players,
like the Shanghai based Baosteel, where one tonne of steel takes around 5 hours to
produce, have productivity levels comparable to developed nations-generally exceeding
400 tonnes. In order to be among the top 500 multi-national companies in the world by
2005, the Baosteel Corporation is reforming its management system and aims to
develop strong competitive ability in the international market. By 2010, the group
should be operating under a unified system, entering the international capital market
and be in the top three of the world’s steel producers from a competitive outlook (CEIS
0618 2003 art.028).
An example of the restructuring occurring is apparent at the Angang steelworks where
in 1988, over 220,000 people were employed and 8 million tonnes of steel was
produced (Hogan 1999) compared with in 1999 when only 166,735 people were
187
employed (24.2% reduction) and 8.5 million tonnes of steel was produced (6.25%
increase).
5.7.3 Environmental Issues With China’s economy developing and the standard of living for the urban population
improving, people will develop a stronger desire to improving lifestyle. The
environmental burden the current industrialisation boom imposes on the country is
another problem that investors appear not to have fully appreciated. China currently is
the world’s second largest producer of greenhouse gases (United States is the leading
producer) and the International Energy Agency (cited in Bradsher 2003, p.1) predicts
that the “increase in greenhouse gas emissions from 2000 to 2030 in China alone will
nearly equal the increase from the entire industrialised world”. As a developing country
China is exempt from the Kyoto Protocol, but with the government’s increasing desire
to be a modern society open to increased and international events is likely to encourage
the government through the State Environmental Protection Agency to increase its
focus on improving the environment.
China has currently being trialling emissions trading in five provinces and cities and it
looks likely this will be extended in 2005 (Lim 2003). Emission licences are tradeable
instruments that in effect allow factories to buy and sell pollution rights. Trading of
emission licences will impose additional costs on factories, higher costs being
associated with higher levels of pollution. No doubt this will encourage factories to
improve their technology, with resulting environmental improvements and lower
negative externalities. This will certainly improve living standards and reduce
respiratory related illnesses, but this will lower the comparative advantage that helped
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China’s steel industry become a world leader – this will tilt the playing fields in the
favour of those developing nations, like India that wish to emulate China’s economic
development using the steel industry model. Nonetheless, it will be necessary for China
to do this in order to reduce its contribution to global warming and improve living
standards and quality of life.
5.7.4 China’s Economic Development As the global economy slowed down from the latter half of 1990s, China has been one
of the few countries to continue achieving a healthy annual GDP growth of around 7%
per year. Its economy together with trading ability has came a long way from the
economic woes following the birth of the republic in 1949 and very poor economic
performance during Mao’s early ruling years up to the early 1970s.
There has been much discussion about the accuracy of GDP and growth figures coming
out of China. Richardson (2001, p.M1) confirms that the Chinese authorities even
admit to there being some flaws in their numbers. Her article quotes analysts reporting
numbers around 2% lower than published. Hong Kong analyst, Pu Yonghao (cited in
The Economist, 16 March, 2002, p.35) believes that they are actually accurate. It seems
many of the provinces understate the numbers rather than overstate to ensure that higher
taxes are not imposed on them and so that they can continue to receive Central
Government support for local projects. Hence, this would suggest that there is no
reason to expect that the Central Government quoted figures are too high. A team at
Goldman, Sachs & Co (cited in Clifford 2003) examined the statistics and found that
some were actually higher than reported and that some were marginally lower. In any
event, as is done for other countries, one needs to focus more on trends rather than
189
specifics. This approach will yield adequate indicators, which should help support
sound judgements in relation to economic assessments to be made. Leow (2002),
reports that the Chinese government is adopting improved methods of gathering and
reporting economic statistics. This will bring their reporting in line with international
practice and should improve accuracy.
At one stage, many of the large developed countries have experienced high growth
along with their iron and steel industries. The global and China’s iron and steel
industries were looked at in earlier chapters and the extent of the output and impact on
the economy was shown. Clearly, China’s economy and its iron and steel industry
performance will continue to have a symbiotic relationship. This relationship should be
maintained long after China’s demand for steel drops off and the country looks to
international trade to support its major industries.
We have seen constant increase in China’s GDP and improvements in international
trade notwithstanding minor stalls between 1994 and 1998 and this is shown in Chart
5.2 (China's International Trade as % GDP, 1981 – 2002). Chart 5.10 shows the rate of
change of China’s GDP from 1953 through to 2002 and it can be seen that the rate of
growth of GDP has not been constant and in fact, years having high growth have been
followed by periods of low growth. The highest rate of growth was found to be in 1994,
from which time the trend has been lower. The occurrence of this trend during a period
of huge infrastructure development activity and with the build up to the 2008 Beijing
Olympics suggests that post 2008 could see a contraction of China’s economy – this
would have the effect of reducing demand for steel.
190
Chart 5.10: Rate of Change of China’s GDP, 1953-2002
Data sources: Chinese Statistics Yearbook 2001 and Asian Development Bank (calculated from
data extracted from these sources)
Countries and organisations wishing to successfully trade with China need to be aware
of this. It is also important they understand both the culture and the economic
development (both historically and future prediction). This will help them develop
appropriate models and strategies to improve the likelihood of success – where many
have failed and never understood why.
-20
-10
0
10
20
30
40
1953
1955
1957
1959
1961
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1965
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5.8 Structural Weaknesses in Economy
As China’s iron and steel industry continues to increase output, drive industrial
production and contributes to the country’s economic development, it is important to
examine structural weaknesses that exist in the country’s economy. These weaknesses
have the potential to derail the current performance of the iron and steel industry and
the economy it is playing a major role in driving. By examining and drawing attention
to these weaknesses, it increases the chance of mitigating the downside risks that they
expose the country to. The structural weaknesses that have been identified are China’s
currency, level of debt and unemployment.
5.8.1 China’s Currency
During the Asian economic crisis, western economists were advising China to devalue
its currency. At that time, it was not considered appropriate by China to vary its
exchange rate policy and that it would remain pegged to the US dollar. The Chinese
government believed at the time, it would be better for Asia if it was not devalued, but
instead shown to be stable and predictable. On reflection, China made the correct
decision. Then as China’s trade performance improved relative to other countries,
many western economists demanded an appreciation of its currency. This was
considered desirable in order to reduce China’s level of competitiveness and increase
the cost of the country’s exports, at the same time decrease import costs. Subsequently,
since the current global economic downturn and in particular the Japanese yen’s fall in
value during the latter part of 1990s, 2001 and 2002 the debate turned back to
devaluation. Then from early in 2003, the US dollar significantly depreciated against
most currencies and the pressure was on again for China to appreciate its currency.
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This time the USA took a more serious view and has been putting pressure on the
Central Government to float the currency. So, what is the outlook for China’s currency
and what impact could it have on the iron and steel industry and the economy in general?
China’s consistent good economic performance is shown by its gross domestic product
growth of around 7% during 2000, 2001 and 2002. China’s neighbours and trading
partners are in agreement that China’s currency should be floated and its resulting value
is expected to significantly increase. China’s trading performance could be
significantly affected by changes to its currency. A higher valued yuan would make
imports cheaper and exports more expensive. The Chinese government does not want
this to happen. With minimal international debt, growing markets and increasing
unemployment, China will continue to strongly resist changing its exchange rate policy.
Tett and Kynge (2001, p.9) report that Japanese politicians believe the undervalued
Chinese currency is hurting Japan’s economic future and urgently needs addressing.
Japan and other Asian countries would like China to revalue, so as to reduce the
competitiveness of its exports. The yuan has remained around 8.3 to the US dollar for
eight years. "In that time, the currency has had a de facto appreciation of about 40 per
cent against the dollar and 26 per cent against other currencies. Following entry to the
World Trade Organisation, the trade surplus is expected to fall, putting downward
pressure on the yuan" (O’Neill 21 Nov 2001b). This reduction of the trade surplus only
occurred during occasional months due to spikes in oil prices during the Iraq war. Guo
Shuqing, the deputy governor of the People's Bank of China and director of the State
Administration of Foreign Exchange, acknowledged that the yuan was likely to
appreciate over the longer term (Reuters 2001b). O’Neill (2001c) reports that an
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appreciated yuan, at about 7.25-7.5 to the dollar, would reduce the yuan value of
China's foreign debt of US$150 billion and reduce United States’ concerns resulting
from many years of high trade surpluses. Guo Shuqing denied that China has been
under any pressure from the United States to revalue its currency42. Around October
2001, the black market value of the Yuan rose to 8.25 to the dollar, against an official
rate of 8.29. Chart 5.11 illustrates exchange rate trends for US, Singapore and
Australian dollars against the yuan.
Chart 5.11: China's Exchange Rate, 1981-1982
Data sources: USD to yuan - Asian Development Bank
Sing$ and Aus$ to yuan – OANDA (website http://www.oanda.com/convert/fxhistory, viewed 8 August 2003).
It was expected that China would buy more Euro currency. The Head of China’s State
Administration of Foreign Exchange said (Guo Shuqing, November 2001) that China
has been buying Euros and will buy more in the future. According to Kynge (2002a,
p.2) China welcomed the introduction of the Euro as it would dilute the dominance of
42 During mid 2003 John Snow, the USA treasurer was publicly pressuring China to float its currency.
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the US dollar and he reports that the Chinese Xinhua News stated: “the costs of
transnational trade will be lowered” with the subsequent devaluation of the USD. China
spreading its foreign exchange reserve exposure from mainly US dollar to Euros during
the latter part of 2002 has subsequently proven to be a very timely move.43
The Chinese authorities’ desire to maintain monetary stability of the currency should
ensure controls will continue until 2006 (Chiu, 2002). Currency controls are considered
to be effective in preventing large outflows of capital. With free-floating currencies,
foreign exchange traders can cause large outflows of currency. This occurred during
the Asian financial crisis and has been blamed for making the crisis worse than it should
have been. It appears a major concern of the Chinese authorities is that if the yuan
appreciated by a large margin, the Chinese economy would suffer much as Japan's did,
and fall into recession.
Since 1994 (refer to Chart 5.1), China has been running up a healthy trade surplus. A
significant amount of the country’s imports are value adding rather than per capita
consumption – this leads to the country collecting significant foreign reserves, which
Samuelson (2002) suggests should be used to stimulate global trade. By revaluing its
currency, the surplus would diminish and other countries would benefit. However, this
is not China’s principle concern at the moment - while it tackles unemployment and
structural reform. In fact, according to Clifford (2002), some analysts believe that due
to the bad loan44 problems China’s banks have; the currency will be devalued rather
than appreciate. The weakness with China’s non-performing loans is examined in
section 5.8.2.
43 USD against the Euro depreciated around 10% since China’s purchases.
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China is increasingly coming under pressure for exporting deflation resulting from its
lower price goods being exported. Haruhiko Kuroda, Japan’s Vice-Finance Minister for
International Affairs complained that falling prices together with fixed exchange rates
were to blame (McGregor 2002). Deflationary pressures cause prices of goods to fall
while costs of wages, services and investment loan servicing remain the same. This
leads to falling corporate profits, closure of factories and deterioration of the economy.
This problem affects industrialised countries that have heavily invested in
manufacturing facilities. The USA, Japan, Germany and other European countries are
significantly impacted, but so also are the developing nations – like Mexico.
In relation to the iron and steel industry from a global perspective, deflation causes less
demand for steel products in those countries losing market share due to being less
competitive, and more demand in countries which are gaining market share due to being
more competitive45. In effect, we have been seeing this with the rise of iron and steel
demand in China at the expense of USA and European steelmakers. This is good for
Australia in that the China market is closer and shipping costs are lower than to Europe
and USA where Australia’s competitors service these markets more.46 The important
finding here is that China’s international competitive position is being maintained by its
low valued currency. This benefits the iron and steel industry in that international
demand for the country’s goods is increasing.
44 Bad loans refer to non performing loans (NPLs). 45 Deflation drives unemployment higher this results in less spending ability. 46 Australia’s competitors have significant sea freight advantage in these other markets.
196
This will become more important after the current period of industrialisation and
reconstruction ends. At this time, China will have a large manufacturing capacity – in
particular more iron and steel capacity than its nation will need and can support. So it is
very important that China is able to maintain its competitive position at this time. This
will be difficult if its currency is allowed to appreciate. It seems the short to medium
term benefits of lower value adding import costs are outweighed by the longer term
capacity and social benefits that will be obtained by a better international trading
competitive position. The problem for China and its iron and steel industry is the
pressure that will be put on them by the USA to float their currency. A low valued
currency has been a key foundation in the development of China’s economy; how long
this can continue for is an issue that needs to be carefully monitored. In the longer
term,47 the value of China’s currency will be a major factor in the health of the nation’s
iron and steel industry.
5.8.2 Finance - debt levels
The state of a nation’s financial system has an important bearing on investment risk,
particularly with high value longer-term capital-intensive investments. An important
aspect of this in relation to China’s industrialisation programme and continued
economic development that will both have major impact on the future of the country’s
iron and steel industry, is the level of non performing loans (NPLs) or bad loans in the
banking sector. These NPLs resulted from the large capital loans given to many of the
government owned companies referred to as state owned enterprises (SOEs). Many of
them ran up very large losses and were subsequently closed or reformed. Their large
debts were not recovered.
47 The length of the term will depend on when and by how much the currency appreciates.
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According to the OECD (2000), China’s total debt was 9.9 trillion yuan (US$1.2
trillion) in 1998. Up to 30% of these are considered bad debt (US$360 billion). Dai
Xianglong, Governor of the People’s Bank of China, quotes the bad debt value as being
26.62% of total debt for the state’s four banks, this equates to 1.8 trillion yuan, about
US$220 billion (The People’s Daily 2002)48. Japan’s economy is just over 3 times
larger than China’s and during 2002 its bad debt problem was seriously impacting the
economy. In comparison, the Bank of Japan’s debt is reported to be US$600 billion
(Bremner 2002). This is an indication that China has a serious problem that if not
resolved would have negative impact on its current economic growth path. It is also an
issue international investors need to be aware of before embarking in large-scale
projects in the country.
Bank loans account for 50-60 percent of the financing of investment in new steel plants
(CEIS 0813 2003, art.032), so continued increases in capacity will lead to a higher risk
of increasing banks’ exposure to worsening bad debts during a period where they are
already at a critical stage. We have already seen that China’s steel productive capacity
has grown and continues to do so as a result of increasing demand.
48 This is during the early part of 2002. This value is considered a low estimate.
198
This continuing increase in capital expansion has the potential at some future time, to
lead to an overcapacity situation, particularly if investment in infrastructure slows
down, consumer demand reduces and productive capacity increases in other countries.
Careless and untimely capacity expansion will increase market risk exposure to
oversupply for both existing and planned steel plants. This situation could cause
inventories to rise, drive steel prices lower, reduce profitability and increase
bankruptcies. Careful attention needs to be paid to the continued capacity expansion of
China’s steel industry. The industry is sensitive to market dynamics and any inefficient
resource allocations which could result in unbalanced industrial structures. This
sensitivity suggests that any one of a number of negative factors has the potential to
seriously impact steel company’s financial risk is one such factor.
China’s authorities have learned from Japan and have introduced strategies to reduce
this NPL burden - direct debt-write offs, listing on domestic stock markets and debt
equity swaps. In addition, they have embarked on reforming the enterprises to improve
performance, behaviour and supporting systems as follows:
• Improving the performance of enterprises - economic restructuring to reduce
excess capacity, improve profitability and reorganise the SOE structure
• Improving the behaviour of the enterprises – introducing collective corporate
governance mechanisms and reforming the financial system
• Developing the supporting institutions – legal reforms and social structures to
allow them to achieve their commercial objectives (OECD 2000, p.14).
The aspirations to fix China’s acute banking bad debt ratio, have led to setting up asset
management companies to handle the bad debts. These companies are empowered to
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sell off the debts to agencies and foreign companies in return for ownership or access
rights. According to Interfax (Interfax China Business News 2002), debts are being
transferred from the big four state banks, Bank of China (BOC), the Industrial and
Commercial Bank of China (ICBC), the China Construction Bank (CCB) and the
Agricultural Bank of China (ICBC) to asset management companies. Lardy (2001,
paragraph 3) reports that the Bank of China disclosed its level of non-performing loans
using an updated methodology “which correspond more closely to international
standards”. The results indicated that the level of non-performing loans in 1999 equated
to 39%. He further outlines that this figure appears to be higher. This is supported by
Moody’s Investors Services (Cited in The New Paper, October 2002, 14th paragraph),
which report the bad debt ratio was “probably between 40 and 45 percent”. It is no
surprise that the Central Bank has ordered the country’s banks to reduce their debt to
15% by 2005 (Clifford 2002). If this is not achieved, it will become a major problem
for both the iron and steel industry, and the country.
As part of the WTO membership agreement, China needs to open its banking sector to
foreign competition in 2007. This will impact on the performance of China’s Banks –
we could see capital leaking out of China as foreign banks repatriate profits to their
home base, this will increase risk to local banks. Hence, the Chinese government is
keen to get its own banks into good shape before that time. It is possible that we may
see some strain on China’s economy prior to this date. Fortunately, the Chinese are
very good savers, so local banks’ liquidity is good. Nevertheless, large foreign banks
may lure the local investors away from the local banks. Another possible development
could be a financial crisis that causes depositors to remove funds quickly from the
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banks. A combination of both would be the start of major financial insecurity and even
crisis in China.
The debt rating agency, Standard & Poor (cited in Clifford 2002) estimates that it will
take US$518 billion, or 45% of China’s 2001 GDP to clean up the debt problem.
Estimates of time required to clean up this problem range from 8 to 21 years. To get an
idea of the magnitude of China’s debt problem it is worth comparing China’s bank debt
situation with the financial crisis in Japan during the late 1990s and 2000s. This is done
using Lardy’s 39% of China’s total bank debt as being non-performing and this gives a
total debt as US$ 475.8 billion. In 2001, China’s nominal GDP was US$1,159.06
billion. This results in a domestic bad debt to GDP ratio in 2001 for China as being
41%. In 2001, Japan’s bank debt was US$600 billion and its nominal GDP as 497,427
billion yen (Bank of Japan, 2002). Converting this at value at an exchange rate of 124
yen to US$1 (being a typical 2001 value), we obtain a GDP of US$4,011.508 billion.
This results in a domestic bad debt to GDP ratio in 2001 for Japan as being 15%.
Significantly better than China’s!
The above numbers are supported by comments in The New Paper (2002a, paragraph
3), which quotes bad debt rates as being “three times higher than the crippling problem
in Japan”. Further it reports that “as many as half of the loans held by China’s four
biggest banks are bad debts”, the total amounting to US$500 billion.
Such large levels have serious potential to cause China economic problems over the
next several years. This then could adversely affect continued sound economic
performance, which is important in that it will have a major effect on the nation’s iron
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and steel industry, particularly with the capacity increases that have occurred and
continue to do so. To better assess the debt levels both public and international, the
following comparison with other Asian economies is useful. This will also enable
potential investors to better assess the country’s financial health before deciding to
make a major investment in the country. Chart 5.12 shows a comparison of
International External Debt with other Asian countries.
Chart 5.12: International External Debt (China compared to Indonesia, Korea,
Malaysia, Singapore and Vietnam), 1981-2001
Data source: Asian Development Bank
It can be seen from Chart 5.12 that China’s international external debt has been
increasing rapidly since the early 1990s. This is the result from the increasing foreign
investments that have been occurring during that time. It appears from the steepness of
the rise between 2000 and 2001 that this debt will continue to increase. Such high
0
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202
external debt levels along with high rate of increase are generally of concern and have
been a topic of discussion in the Chinese media. In order to better understand whether
such high debt levels will adversely impact China’s iron and steel industry, the research
analyses this exposure further and also clarifies whether such levels should give rise to
high-risk exposure for investors and traders dealing with the country’s iron and steel
producers. To do this, we examine the level of this international external debt in
relation to national output - see Chart 5.13 and in relation to international external debt
as a percentage of total reserves - see Chart 5.14. The ratio of international external
debt as percentage of GDP is known as the liability ratio. This is a good comparison to
assess whether a country is overexposed. The ability of a country to repay its
international debt can be seen from the corresponding level of its foreign reserves.
Chart 5.13: International External Debt as Percent of GDP (liability ratio) (China
compared to Indonesia, Korea, Malaysia, Singapore and Vietnam), 1981-2001
Data sources: Asian Development Bank
Chart 5.13 shows that in relation to GDP, China’s international external debt is one of
the lowest in the region, and notwithstanding the serious NPL problem, with such low
Source: 1900 - 2001 Data:International Iron & Steel Institute Yearbooks, various years
International Iron and Steel Institute, Steel Statistical Yearbook 1982International Iron and Steel Institute, Steel Statistical Yearbook 1989International Iron and Steel Institute, Steel Statistical Yearbook 1991International Iron and Steel Institute, Steel Statistical Yearbook 1999International Iron and Steel Institute, Steel Statistical Yearbook 2001International Iron and Steel Institute, Steel Statistical Yearbook 2002
2002 Data: CRU Monitor Bulk Ferroalloys, March 2003
278
9.1.4 Summary-Crude Steel Production
279
9.1.5 China Steel Growth Predictions International Iron and Steel Predictions:
World annual growth 1.70%China annual growth 6.70%
Source: International Iron & Steel Predictions cited in:China Economic Information Service, CEIS 0423, 2002, “More steel products on demand in 2003”, Xinhua News Agency, 23 April, 2003, Beijing art.032
280
9.1.6 Summary-Continuously Cast Steel Production
281
9.1.7 Summary-Production of Steel in Oxygen Blown Converters
282
9.1.8 Summary-Production of Steel in Electric Arc Furnaces
283
9.1.9 Summary-Production of Steel in Open Hearth Furnaces
284
9.1.10 Summary-Apparent Crude Steel Consumption
285
9.1.11 Summary-Apparent Crude Steel Consumption per Capita
Sources: International Iron and Steel Institute, Steel Statistical Yearbook 1999, Brussels, January 2000, pp196-198from 1998 on: IISI, Steel Statistical yearbook, 2002, p86-89
286
9.1.12 Productivity of Top 6 Crude Steel Producers
Sources:American Iron Ore Association reports - 1996, 1990, 1982, 1979, 1970, 1962, 1957 "World production of Iron Ore, Iron Ore Concentrates and Iron Ore Agglomerates by Countries"The above reports were used for data from 1948 to 1995. Original data was in US tons. Conversion was made to metric tonnes.From 1996 data from International Iron and Steel Institute 2002 Data for the world from AME Iron Ore Outlook, January 20032002 Data for China from China Customs Bureau
292
9.2.2 Australian Historical Iron Ore Production, 1950-2002
9.2.6 Composition of Iron Ore Imports to China, 1975-2002
297
9.2.7 Composition of Australian Iron Ore Exports, 1975-2002
298
9.3 Key phases of China’s reform
First phase 1978-1984
o Rehabilitating the economy after the great leap forward o Placing greater emphasis on the market o Setting up special economic zones o Encouraging material incentives.
Second phase 1984-1988
o Reforming the urban industrial sectors o Introducing enterprise taxation o Reforming the wage system (linking pay to productivity) o Reforming the investment system – encouraging borrowing o Attracting capital and expertise. 14 major coastal cities were opened up (this
was subsequently expanded). Third phase 1988-1991
o Period of retrenchment o Reforms increased demand and production and led to inflation o Tackling an overheated economy – aim to slow down industrial sector. This led
to increased debt levels. Fourth phase 1992-
o Authorities announcing intention to accelerate the reform process o Communist party embraced Deng Xiaoping’s view that the market system was
not incompatible with the ideals of socialism o In March 1992, China’s constitution was amended to delete references to “ a
planned economy” and to enshrine the new goal of establishing A MARKET SYSTEM
o Extension of open door policy to all of China o More special economic zones were opened. o Became member of WTO in November 2001.
Sources: Bell et al (1993, pp.2-5) and Demurger et al (2002)
299
9.4 China Steel Industry
9.4.1 Steel products supply in 2002 with forecast for 2003
Data source: National Bureau of Statistics 2003 (cited in CEIS 0217 2003, art.40)
313
9.6 China Map - Steel and Iron Ore Regions
314
9.7 Australia – China Shipping Map
Source: SSY Consultancy and Research Ltd 1999, (between pages 192 and 193)
315
9.8 Developments in China’s Iron & Steel Industry
As an example of the development that is occurring throughout China’s iron and steel
industry, two examples are outlined below. These are typical of many such capacity
investments occurring.
Baosteel
• Baosteel plans to construct four specialised production bases - Carbon steel plate
and tube production, stainless steel production, special steel production and steel
stretching base (CEIS 0709 2003, art 037)
• Construction of two steel mills costing 12 billion yuan (US$1.45 billion). One
mill consists of a wide and heavy plate rolling production line and supporting
continuous casting facilities. It is scheduled for operation by April 2005. The
second mill will be for producing cold rolled flat plate project and this will be
operational in March 2005. The mills are to satisfy a growing demand for steel
in the automotive, shipbuilding and construction industries (CEIS 0115, 2003
art.035).
Pingxiang Steel (Jiangxi Province)
Pingxiang Steel is building a 2 million-tonne Greenfield integrated steelworks in
Baiyuan County, near Pingxiang at a cost of 5 billion yuan. It will be built in two
stages and be completed by October 2005. The new steelworks will have three 450-
cubic-meter furnaces, three 20-tonne converters, three 3-strand billet casters, two high-
speed wire rod and bar mills, and accompanying sinter and coking mills (CEIS 0710
2003, art.032).
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9.9 Extract from Zhu Rongji’s Government Work Report
Former Premier, Zhu Rongji gave an insight into the direction of reform and developments in
his report on the work of the Government delivered at the First Session of the 10th National
People's Congress on 5 March 2003. Summarised extracts of this speech relating to the findings
of this research thesis are below.
• Continue to expand domestic demand and achieve a steady and rapid economic growth.
First, we should strive to expand consumption demand. Given the current situation, this is
more important than greater investment demand
• We should invest more in the development of agriculture infrastructure and in agricultural
science and technology. We should take effective measures to support the old industrial
bases in Northeast China and other regions in their efforts to quicken readjustment and
technological transformation. Encourage cities or areas that are mainly dependent on
resource exploitation to develop alternative industries
• Conscientiously implement the strategy of national rejuvenation through science,
technology, education and the strategy of sustainable development
• Strengthening national defence and the armed forces is a reliable guarantee for national
security and the modernisation drive. In keeping with the general requirements of being
qualified politically, competent militarily, having a fine style of work, maintaining strict
discipline and being assured of adequate logistic support, we must work hard to bring our
work of building a more modern, regularised and revolutionary army to a new height. We
must implement a military strategy of active defence in the new era and get better prepared
for military struggle. We should balance well the need to build a strong defence with
economic development. Greater importance should be given to defence-related scientific
research and the development of weapons and equipment, so as to enhance our military's
overall defence combat readiness under high-tech conditions. We must build stronger
logistic capability and vigorously promote the readjustment, reform and development of
our defence-related science, technology and industry. Governments at all levels should
give full support to the development of national defence and army building, and public
awareness of defence should be further raised. We should consolidate the solidarity
between the army on the one hand and the government and people on the other through
more vigorous activities to promote their mutual support.
Source: China Economic Information Service (CEIS 0320 2003, arts 058, 061, 065 & 068)
317
9.10 Composition of China's Exports to USA, 2002
Category Value in
2002 (US$ 1,000)
Total value 69,950,533
Live animals and animal products 662,644
Plant products 226,872
Animal and vegetable oil and fats 6,257
Food, beverages, wine, vinegar, tobacco and products 712,497
Minerals 607,262
Chemicals and related products 2,249,304
Plastics, rubber and their products 3,179,507
Leather, fur and their products; bags and cases 2,464,072
Wood and wood products 876,078
Fibre pulp; paper and paper products 481,205
Textiles and their raw materials 5,427,593
Shoes, caps, umbrellas; down products; artificial flowers;
hair products 5,904,608
Stone products; ceramics; glass and products 1,139,172
Jewellery, ornaments, coins 549,190
Cheap metals and products 4,406,550
Machinery, equipment, audio and video products and
parts 26,234,741
Vehicles, aviation products and ships 2,256,235
Optical and medical apparatus; timepieces; music organs 2,080,831
Weapon, ammunition and parts 5,592
Miscellaneous goods 10,465,311
Arts, crafts and antiques 8,108
Special and unclassified products 6,904
Data source: China Economic Information Service (CEIS 0324 2003, art.021)
318
9.11 Composition of China's Import from USA, 2002
Category Value in
2002 (US$ 1,000)
Total value 27,230,057
Live animals and animal products 762,204
Plant products 1,097,360
Animal and vegetable oil and fats 37,872 Food, beverages, wine, vinegar, tobacco and products 276,918
Minerals 237,183
Chemicals and related products 3,280,812 Plastics, rubber and their products 1,404,139
Leather, fur and their products; bags and cases 504,759
Wood and wood products 262,414
Fibre pulp; paper and paper products 1,242,121
Textiles and their raw materials 437,056
Shoes, caps, umbrellas; down products; artificial flowers;
hair products 46,529
Stone products; ceramics; glass and products 110,102
Jewellery ornaments, coins 288,551
Cheap metals and products 1,259,748
Machinery, equipment, audio and video products and
parts 11,169,523
Vehicles, aviation products and ships 2,606,413
Optical and medical apparatus; timepieces; music organs 2,129,013
Weapon, ammunition and parts 8 Miscellaneous goods 74,865
Arts, crafts and antiques 401
Special and unclassified products 2,066
Data source: China Economic Information Service (CEIS 0324 2003, art.022)
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9.12 Steel for the Beijing Olympics
Construction for the Beijing Olympics in 2008 is a large consumer of steel products –
mainly long structural type steel. The following is examples of some of the
construction work to be carried out:
• 22 new stadiums, total floor space of 1.69 million square metres having steel
designed structures, using 300,000 tonne of steel products
• Renovate 15 existing stadiums
• An athlete village with total floor space of 355,000 square metres
• A service building with floor space of 218,400 square metres
• Urban infrastructure facilities
• A new 502-metre-high World Trade Building, having floor space of 601,500 square
metres
• A public transit system consisting an expressway.
The above projects are estimated to consume approximately three million tonnes of
steel products. In preparation for the Olympics, China will invest in environmental
protection, which will stimulate demand for steel products. Before 2007, Beijing will
complete 20 key environmental projects with total investment to reach 60-70 billion
yuan (approx US$8 billion), of which 10% will be used to purchase steel products.
Source: China Economic Information Service (CEIS 0423 2003, art.031).
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9.13 Fixed Asset Investment in China 2002
Below is an outline of key fixed asset investment projects in 2002. It shows the nature of
investment that is driving construction and in turn steel demand.
• Investment in the western part of China reached 451.9 billion yuan between January-
November 2002, up 25% year on year. Investment in the eastern part of China was 1,481.2
billion yuan, and that in the central part of the country was 588.1 billion yuan
• With the construction of water conservancy projects and implementation of the state plan
of recovering farmland into forestland and grass planting, investment in the primary
industry reached 86.9 billion yuan in the first 11 months of 2002, rising 35.2% year on
year. Investment in the secondary industry reached 838.3 billion yuan, up 27.4%. Of this,
investment in some major industrial sectors such as raw materials increased 39.6 percent,
machinery and electronics, up 43.8%, and textile and light industries, up 41.2%.
Investment in the tertiary industry topped 1,686.6 billion yuan, an increase of 21%, or
accounting for about 65% of the total
• The Three-Gorges water project on the Yangtze River. This will continue through until
2010 and it is expected this project will consume around 800,000 tonnes of steel
• Transmitting gas from the west to the east, a strategic construction, with total investment
exceeding 140 billion yuan
• Construction of the 1,956 kilometre Qinghai-Tibet railway, which is estimated to cost 36
billion yuan (US$4.34 billion) started in 2001 and is scheduled to be completed by 2007.
• Transmitting electric power from the west to the east at a cost of 550 billion yuan
• Diverting water from the south to the north of the country started in December 2002. This
project is estimated to cost 500 billion yuan. It will consist of three water division lines:
the east, the central and the west lines. These will form a national water supply network
linking the Yangtze River with the Yellow River, the Huaihe River and the Haihe River.
Upon completion, the project should divert about 38-48 billion cubic metres of water per
year
• By the end of 2002, China would have constructed around 3,576 kilometres of dykes and
dams on the Yangtze River and constructed 5,500 kilometres of new railway lines, 76,000
kilometres of highways and 35 airports.
Source: China Economic Information Service (CEIS 0306 2003 art.032)
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9.14 Australia China Trade
9.14.1 Summary of Australian Trade with Top 5 Countries, 2000-2002
Australia's Major Merchandise Export Markets in Australian Dollars
Rank Country 1996 1997 1998 1999 2000 2001 20021 Japan 15,565,269 16,813,521 17,384,657 16,707,495 21,803,117 23,723,790 22,164,108 2 United States 4,978,171 6,338,630 8,475,802 8,410,713 10,980,389 11,913,724 11,531,903 3 Rep of Korea 7,304,900 6,762,549 6,105,069 6,280,021 9,045,634 9,530,726 9,972,206 4 China 3,877,541 3,976,587 3,792,032 4,091,083 6,008,786 7,581,662 8,367,956 5 New Zealand 5,659,620 6,179,617 5,691,286 6,674,023 6,568,789 7,182,770 7,920,252
Australia's Major Merchandise Import Markets in Australian Dollars for year 2000
Rank Country 1996 1997 1998 1999 2000 2001 20021 United States 18,017,166 18,174,430 21,548,781 21,139,791 23,122,358 21,399,072 23,148,431 2 Japan 10,212,983 11,409,193 13,318,942 13,636,432 15,316,497 15,259,614 15,741,289 3 China 4,121,992 4,739,335 5,822,546 6,613,066 9,073,206 10,311,902 12,848,432 4 Germany 4,701,304 4,668,318 5,822,598 5,827,601 5,882,034 6,662,739 7,336,868 5 United Kingdom 5,031,069 5,321,590 5,781,228 5,406,940 6,956,909 6,282,213 5,846,145
A$ to US$ = 0.55 (rate during 2002)
Australia's Major Merchandise Export Markets Converted to US Dollars
Rank Country 1996 1997 1998 1999 2000 2001 20021 Japan 8,560.90 9,247.44 9,561.56 9,189.12 11,991.71 13,048.08 12,190.26 2 United States 2,737.99 3,486.25 4,661.69 4,625.89 6,039.21 6,552.55 6,342.55 3 Rep of Korea 4,017.70 3,719.40 3,357.79 3,454.01 4,975.10 5,241.90 5,484.71 4 China 2,132.65 2,187.12 2,085.62 2,250.10 3,304.83 4,170 4,602.38 5 New Zealand 3,112.79 3,398.79 3,130.21 3,670.71 3,612.83 3,950.52 4,356.14
Australia's Major Merchandise Import Markets in USDollars
Rank Country 1996 1997 1998 1999 2000 2001 20021 United States 9,909 9,996 11,852 11,627 12,717 11,769.49 12,731.64 2 Japan 5,617 6,275 7,325 7,500 8,424 8,392.79 8,657.71 3 China 2,267 2,607 3,202 3,637 4,990 5,672 7,066.64 4 Germany 2,586 2,568 3,202 3,205 3,235 3,664.51 4,035.28 5 United Kingdom 2,767 2,927 3,180 2,974 3,826 3,455.22 3,215.38
Source: 1996 and 1997 - Composition of Trade Australia, 2000, DFAT, April 2001, pages 163 to 309
1998- Composition of Trade Australia 2000, DFAT, April 2001, pages 49 and 54
1999 - Composition of Trade Australia 2001, DFAT, May 2002, pages 48 and 53
2000 to 2002 - Composition of Trade Australia 2002, DFAT, May 2002, pages 50 and 55
Values in A$,000
Values in A$,000
Values in USD million
Values in USD million
322
9.14.2 Australian Merchandise Trade by Country, 2000-2002
Aud Australia Merchandise Trade by Country, 2000 -Rank Country Net Exports
A$,000 % Share A$,000 % Share A$,000 A$,000 % Share1 Japan 21,844,241 19.79 15,315,770 13.10 6,528,471 37,160,011 16.342 United States 10,979,542 9.94 23,123,199 19.77 (12,143,657) 34,102,741 15.003 China 6,009,929 5.44 9,072,968 7.76 (3,063,039) 15,082,897 6.634 Rep of Korea 9,047,728 8.20 4,802,805 4.11 4,244,923 13,850,533 6.095 New Zealand 6,564,382 5.95 4,486,558 3.84 2,077,824 11,050,940 4.86
World Total 110,404,970 49.31 116,946,548 100 (6,541,578) 227,351,518 100
Source: Composition of Trade Australia 2000, DFAT, April 2001, page 44-45A$ to US$ = 0.55 (rate during 2002)
USDRank Country Net Exports
USD,000 % Share USD,000 % Share USD,000 USD,000 % Share1 Japan 12,014,333 19.79 8,423,674 13.10 3,590,659 20,438,006 16.342 United States 6,038,748 9.94 12,717,759 19.77 (6,679,011) 18,756,508 15.003 China 3,305,461 5.44 4,990,132 7.76 (1,684,671) 8,295,593 6.634 Rep of Korea 4,976,250 8.20 2,641,543 4.11 2,334,708 7,617,793 6.095 New Zealand 3,610,410 5.95 2,467,607 3.84 1,142,803 6,078,017 4.86
World Total 60,722,734 49.31 64,320,601 48.57 (3,597,868) 125,043,335 48.93
Aud Australia Merchandise Trade by Country, 2001 -Rank Country Net Exports
A$,000 % Share A$,000 % Share A$,000 A$,000 % Share1 Japan 23,719,485 19.36 15,259,405 12.45 8,460,080 38,978,890 31.812 United States 11,925,057 9.73 21,410,739 17.47 (9,485,682) 33,335,796 27.203 China 7,583,928 6.19 10,312,212 8.41 (2,728,284) 17,896,140 14.604 Rep of Korea 9,528,704 7.78 4,634,951 3.78 4,893,753 14,163,655 11.565 New Zealand 7,176,534 5.86 4,741,176 3.87 2,435,358 11,917,710 9.73
World Total 122,546,379 48.91 117,741,528 45.99 4,804,851 240,287,907 94.90
Source: Composition of Trade Australia 2001, DFAT, May 2002, page 43-47USDRank Country Net Exports
USD,000 % Share USD,000 % Share USD,000 USD,000 % Share1 Japan 13,045,717 19.36 8,392,673 12.45 4,653,044 21,438,390 31.812 United States 6,558,781 9.73 11,775,906 17.47 (5,217,125) 18,334,688 27.203 China 4,171,160 6.19 5,671,717 8.41 (1,500,556) 9,842,877 14.604 Rep of Korea 5,240,787 7.78 2,549,223 3.78 2,691,564 7,790,010 11.565 New Zealand 3,947,094 5.86 2,607,647 3.87 1,339,447 6,554,741 9.73
World Total 67,400,508 48.91 64,757,840 45.99 2,642,668 132,158,349 94.90
Aud Australia Merchandise Trade by Country, 2002 -Rank Country Exports Imports Net Exports Total
A$,000 % Share A$,000 % Share A$,000 A$,000 % Share1 Japan 22,164,108 18.56 15,741,289 13.18 6,422,819 37,905,397 31.742 United States 11,531,903 9.66 23,148,431 19.38 (11,616,528) 34,680,334 29.043 China 8,367,956 7.01 12,848,432 10.76 (4,480,476) 21,216,388 17.764 Rep of Korea 9,972,206 8.35 4,763,978 3.99 5,208,228 14,736,184 12.345 New Zealand 7,920,252 6.63 4,874,438 4.08 3,045,814 12,794,690 10.71
World Total 119,436,000 50.20 127,642,000 51.39 (8,206,000) 247,078,000 101.59
Source: Composition of Trade Australia 2002, DFAT, May 2003, pages 50 and 55USDRank Country Exports Imports Net Exports Total
USD,000 % Share USD,000 % Share USD,000 USD,000 % Share1 Japan 12,190,259 18.56 8,657,709 13.18 3,532,550 20,847,968 31.742 United States 6,342,547 9.66 12,731,637 19.38 (6,389,090) 19,074,184 29.043 China 4,602,376 7.01 7,066,638 10.76 (2,464,262) 11,669,013 17.764 Rep of Korea 5,484,713 8.35 2,620,188 3.99 2,864,525 8,104,901 12.345 New Zealand 4,356,139 6.63 2,680,941 4.08 1,675,198 7,037,080 10.71
World Total 65,689,800 50.20 70,203,100 51.39 (4,513,300) 135,892,900 101.59
Exports Imports Total
Exports Imports Total
Exports Imports Total
Exports Imports Total
323
9.14.3 Australia’s Top Trades with China, 1996-2002 Australia's top Exports ( those above A$200,000 ranked at 2002) to China, 1996-2002Values in A$,000Commodity 1996 1997 1998 1999 2000 2001 2002Wool 758,763 846,186 591,911 644,465 1,101,628 1,279,570 1,419,708Iron Ore 570,207 829,668 854,317 731,692 1,044,940 1,368,962 1,481,370Crude Petroleum 37,927 82,440 24,300 245,888 416,876 300,402 369,092Coal x x 127,361 124,933 116,892 68,622 223,946Copper Ores 128,921 101,930 189,811 111,721 195,016 306,361 204,078Aluminium x x 108,703 142,159 156,294 170,849 222,779
Australia's top Imports (those above A$500,000 ranked at 2002) from China,1996-2002Values in A$,000Commodity 1996 1997 1998 1999 2000 2001 2002Clothing of textile Fabrics 332,099 396,846 486,380 508,026 661,044 748,378 743,364Toys Games & Sporting goods 338,710 400,749 461,165 457,849 621,584 688,134 802,543Footwear 279,982 302,237 372,547 410,583 494,915 530,379 614,447Computers 62,334 109,681 132,739 235,922 449,042 590,117 870,779Women's/Girls' clothing x x 233,035 298,379 404,343 509,861 584,122
A$ to US$ = 0.55 (rate during 2002)
Values in US$ million (Calculated from above)Australia's top Exports ( those above A$200,000 ranked at 2002) to China, 1996-2002Commodity 1996 1997 1998 1999 2000 2001 2002Wool 417.32 465.40 325.55 354.46 605.90 703.76 780.84Iron Ore 313.61 456.32 469.87 402.43 574.72 752.93 814.75Crude Petroleum 20.86 45.34 13.37 135.24 229.28 165.22 203.00Coal x x 70.05 68.71 64.29 37.74 123.17Copper Ores 70.91 56.06 104.40 61.45 107.26 168.50 112.24Aluminium x x 59.79 78.19 85.96 93.97 122.53
Australia's top Imports (those above A$500,000 ranked at 2002) from China,1996-2002Values in US$ million (Calculated from above)Commodity 1996 1997 1998 1999 2000 2001 2002Clothing of textile Fabrics 182.65 218.27 267.51 279.41 363.57 411.61 408.85Toys Games & Sporting goods 186.29 220.41 253.64 251.82 341.87 378.47 441.40Footwear 153.99 166.23 204.90 225.82 272.20 291.71 337.95Computers 34.28 60.32 73.01 129.76 246.97 324.56 478.93Women's/Girls' clothing x x 128.17 164.11 222.39 280.42 321.27
Note: Items marked with x were not in the top ranking in that year
Source: Composition of Trade Australia 2000, DFAT, April 2001, page 163 -165
Composition of Trade Australia 2001, DFAT, April 2001, page 163-165
Composition of Trade Australia 2002, DFAT, May 2003, pages 169 -170
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9.14.4 Australia – China Trade breakdown, 2002
Category Export Value to Australia (US$ 1,000)
Import Value from Australia
(US$ 1,000) Total value 4,585,594 5,850,242
Live animals and animal products 18,481 111,223
Plant products 23,729 345,747
Animal and vegetable oil and fats 1,519 54,445
Food, beverages, wine, vinegar, tobacco and products 90,031 88,861
Minerals 125,446 1,765,321
Chemicals and related products 287,797 770,103
Plastics, rubber and their products 193,867 59,537
Leather, fur and their products; bags and cases 105,126 187,855
Wood and wood products 25,902 62,645
Fibre pulp; paper and paper products 63,216 100,999
Textiles and their raw materials 1,242,796 828,605
Shoes, caps, umbrellas; down products; artificial
flowers; hair products 166,309 181
Stone products; ceramics; glass and products 119,330 2,968 Jewellery, ornaments, coins 33,236 478,605
Cheap metals and products 368,914 704,288
Machinery, equipment, audio, video products & parts 1,185,190 233,031
Vehicles, aviation products and ships 117,128 6,387
Optical and medical apparatus; timepieces; music
organs 72,594 41,358
Weapon, ammunition and parts 4 61
Miscellaneous goods 344,731 7,967
Arts, crafts and antiques 222 54
Special and unclassified products 30 -
Data source: China Economic Information Service (CEIS 0324 2003, arts.023 & 024)
Note: The total quoted export value to Australia is lower than that quoted by Australia’s
Department of foreign Affairs and Trade. The above values have been reproduced as reported
by China’s General Administration of Customs as cited in the China Economic Information
Service, CEIS 0324 2003. They do not appear complete.
325
9.15 China’s Top Eleven Import Commodities, 2000 and 2001
US$ billion
Rank* Commodity 2000 2001
1 Mechanical and electrical products 102.868 120.524
2 Crude Oil 14.861 11.666
3 Rolled Steel 8.536 8.964
4 Data processing machines 4.516 4.981
5 Refined petroleum products 3.657 3.769
6 Aircraft 1.630 3.656
7 Paper and paperboard 3.296 3.057
8 Soybean 2.270 2.81
9 Polyethylene in Primary form 2.134 2.656
10 Motor vehicle parts 2.113 2.528
11 Iron Ore 1.858 2.503
Data source: National Bureau of Statistics of China 2002, China Statistical Yearbook 2002,
no.21, pp.624-625.
* Ranking is on 2001 values.
326
9.16 Map Showing Australia’s Iron Ore Mines
Source: The Tex Report, Iron Ore Manual 2002-2003, p.237
327
9.17 Steel Tariff Changes Following WTO Membership
China's Import Duty Rates for Articles For Iron And Steel Goods From 1 January 2003:
Sources: The Customs General Administration of the P.R.C, cited in CEIS 0319 2003, articles 029, 030, 031, 032, 033, 034, 035, 036. Tariff No. Description of Goods Import Duty Rates M.F.N % General % I. -PRIMARY MATERIALS; PRODUCTS IN GRANULAR OR POWDER FORM Pig iron and spiegeleise in pigs, blocks or other primary forms: -Non-alloy pig iron 1 8 containing by weight 0.5 % or less of phosphorus 7301.2000 -Non-alloy pig iron 1 8 containing by weight more than 0.5% of phosphorus 7201.5000 -Alloy pig iron; spiegeleisen 1 8 72.02 Ferro-alloys:Ferro-manganese: 7202.1100 --Containing by weight more 2 11 than 2% of carbon 7202.1900 --Other 2 11 -Ferro-silicon: 7202.2100 --Containing by weight more 2 11 than 55% of silicon 7202.2900 --Other 2 11 7202.3000 -Ferro-silico-manganese 2 11 -Ferro-chromium: 7202.4100 --Containing by weight more 2 8 than 4% of carbon 7202.4900 --Other 2 8 7202.5000 -Ferro-silico-chromium 2 11 7202.6000 -Ferro-nickel 2 11 7202.7000 -Ferro-molybdenum 2 11 -Ferro-tungsten and ferro-silico-tungaten: 7202.8010 ---Ferro-tungsten 2 11 7202.8020 ---Ferro-silico-tungsten 2 11 -Other: 7202.9100 --Ferro-titanium and ferro- 2 11 silico-titanium 7202.9200 --Ferro-vanadium 9 30 7202.9300 --Ferro-niobium 2 11 7202.9900 --Other 2 11 72.03 Ferrous products obtained by direct reduction of iron ore and other spongy ferrous products, in lumps, pellets or similar forms; iron having a minimum purity by weight of 99.94%, in lumps, pellets or similar forms: 7203.1000 -Ferrous products obtained by direct 2 8 reduction of iron ore 7203.9000 -Other 2 8 72.04 Ferrous waste and scrap; remelting scrap ingots of iron steel: 7204.1000 -Waste and scrap of cast iron 2 8 -Waste and scrap of alloy steel: 7204.2100 --Of stainless steel 0 8
328
Tariff No. Description of Goods Import Duty Rates M.F.N % General % 7204.2900 --Other 0 8 7204.3000 -Waste and scrap of tinned 2 8 iron or steel-Other waste and scrap: 7204.4100 --Turnings, shavings, 2 8 chips, milling waste, sawdust, filings, trimmings and stampings whether or not in bundles 7204.4900 --Other 0 8 7204.5000 -Remelting scrap ingots 0 8 72.05 Granules and powders, of pig iron, spiegeleisen iron or steel: 7205.1000 -Granules 2 30 -Powders: 7205.2100 --Of alloy steel 2 17 7205.2900 --Other 2 17 II. -IRON AND NON-ALLOY STEEL 72.06 Iron and non-alloy steel in ingots or other primary forms (excluding iron of heading No.72.03): 7206.1000 -Ingots 2 11 7206.9000 -Other 2 11 72.07 Semi-finished products of iron or non-alloy steel: -Containing by weight less than 0.25% of carbon: 7207.1100 --Of rectangular (including 2 11 square) cross-section, the width measuring less than twice thickness 7207.1200 -Other, of rectangular 2 11 (other than square cross- section 7207.1900 --Other 2 11 7207.2000 -Containing by weight 0.25% or more of 2 11 carbon 72.08 Flat-rolled products of iron or non-alloy steel of a width, of 600 mm or more hot-rolled, not clad, plated or coated: 7208.1000 -In coils, not further worked 5 14 than hot-rolled, with patterns in relief -Other, in coils, not further worked than hot-rolled, pickled: 7208.2500 --Of a thickness of 4.75 mm or more 5 14 7208.2600 --Of a thickness of 3 mm or more 5 14 but less than 4. 75mm 7208.2700 --Of a thickness of less than 3mm 5 14 -Other, in coils, not further worked than hot-rolled: 7208.3600 --Of a thickness exceeding 6 14 10 mm 7208.3700 --Of a thickness of 4.75 mm or more 5 14 but not exceeding 10 mm --Of a thickness of 3 mm or more but less than 4.75 mm 7208.3810 --Yield strength > 355 5 14 Newton/mm2 7208.3890 ---Other 5 14 --Of a thickness of less than 3 mm: 7208.3910 ---Thickness < 1.5 mm 5 14 7208.3990 ---Other 5 14
329
Tariff No. Description of Goods Import Duty Rates M.F.N % General % 7208.4000 -Not in coils, not further 6 17 worked than hot-rolled, with patterns in relief -Other, not in coils, not further worked than hot- rolled: --Of a thickness exceeding 10 mm: 7208.5110 ---Thickness > 50 mm 6 17 7208.5120 ---20mm < thickness <= 50 mm 6 17 7208.5190 ---Other 6 17 7208.5200 --Of a thickness of 4.75 mm or more 6 17 but not exceeding 10 mm --Of a thickness of 3 mm or more but less than 4.75 mm: 7208.5310 ---Yield strength > 355 6 17 Newton/mm2 7208.5390 ---Other 6 17 --Of a thickness of less than 3 mm: 7208.5410 ---Thickness < 1.5 mm 6 17 7208.5490 ---Other 6 17 7208.9000 -Other 6 17 72.09 Flat-rolled products of iron or non-alloy steel, of a width of 600 mm or more, cold-rolled (cold-reduced), not clad, plated or coated: -In coils, not further worked than cold-rolled (cold-reduced --Of a thickness of 3mm or more 7209.1510 ---Yield strength > 355 6 17 Newton/mm2 7209.1590 ---Other 6 17 --Of a thickness exceeding 1mm but less than 3 mm: 7209.1610 ---Yield strength > 275 6 17 Newton/mm2 7209.1690 ---Other 6 17 --Of a thickness of 0.5 mm or more but not exceeding 1mm: 7209.1710 ---Yield strength > 275 6 17 Newton/mm2 7209.1790 ---Other 6 17 --Of a thickness of less than 0.5 mm: 7209.1810 ---Thickness < 0.3 mm 6 17 7209.1890 ---Other 6 17 -Not in coils, not further worked than cold-rolled (cold-reduced) 7209.2500 --Of a thickness of 3 mm or more 6 17 7209.2600 --Of a thickness exceeding 6 17 1mm but less than 3mm 7209.2700 --Of a thickness of 0.5 mm 6 17 or more but not exceeding l mm 7209.2800 --Of a thickness of less than 0.5 mm 6 17 7209.9000 -Other 6 17 72.10 Flat-rolled products of iron or non-alloy steel, of a width of 600 mm or more, clad, plated or coated: -Plated or coated with tin: 7210.1100 --Of a thickness of 0.5 mm 10 20 or more 7210.1200 --Of a thickness of less than 0.5 mm 5 20 7210.2000 -Plated or coated with lead, 4 20 including terneplate 7210.3000 -Electrolytically plated or coated with zinc 8 20 Tariff No. Description of Goods Import Duty Rates
330
M.F.N % General % -Otherwise plated or coated with zinc: 7210.4100 --Corrugated 8 20 7210.4900 --Other 4 20 7210.5000 -Plated or coated with chromium oxides 8 20
or with chromium and chromium oxides -Plated or coated with aluminium:
7210.6100 --Plated or coated with 8 20 aluminium-zinc alloys 7210.6900 --Other 8 20 7210.7000 Painted, varnished or 4 20 coated with plastics 7210.9000 -Other 8 20 72.11 Flat-rolled products of iron or non-alloy steel, of a width of less than 600 mm, not clad, plated or coated: -Not further worked than hot-rolled: 7211.1300 --Rolled on four faces or in a closed box 6 30
pass, of a width exceeding 150 mm and a thickness of not less than 4 mm, not in coil and with out patterns in relief
7211.1400 --Other, of a thickness of 6 30 4. 75mm or more 7211.1900 --Other 6 30 -Not further worked than cold-rolled (cold-reduced): 7211.2300 --Containing by weight less 6 30 than 0.25% of carbon 7211.2900 --Other 6 30 7211.9000 -Other 6 30 72.12 Flat-rolled products of iron or non-alloy steel, of a width of less than 600 mm, clad, plated or coated: 7212.1000 -Plated or coated with tin 5 20 7212.2000 -Electrolytically plated or 8 20 coated with zinc 7212.3000 -Otherwise plated or coated 8 20 with zinc 7212.4000 -Painted, varnished or coated with 4 20 plastics 7212.5000 -Otherwise plated or coated 8 20 7212.6000 -Clad 8 20 72.13 Bars and rods, hot-rolled, in irregularly wound coils,of iron or non-alloy steel: 7213.1000 -Containing indentations, ribs, grooves or 4.8 20 other deformations produced during the rolling process 7213.2000 -Other, of free-cutting steel 4.8 20 -Other: 7213.9100 --Of circular cross-section 5 20 measuring less than 14 mm in diameter 7213.9900 --Other 5 20 72.14 Other bars and rods of iron or non-alloy steel, not further worked than forged, hot-rolled, hot-drawn or hot-extruded, but including those twisted after rolling: 7214.1000 -Forged 7 20
331
Tariff No. Description of Goods Import Duty Rates M.F.N % General % 7214.2000 -Containing indentations, ribs, grooves 3 20
or other deformations produced during the rolling process or twisted after rolling
7214.3000 -Other, of free-cutting steel 7 20 -Other: 7214.9100 --Of rectangular cross section 3 20 (other than square) 7214.9900 --Other 3 20 72.15 Other bars and rods of iron or non-alloy steel: 7215.1000 -Of free-cutting steel, not further worked 7 20 than cold- formed or cold-finished 7215.5000 -Other, not further worked than 7 20 cold-formed or cold-finished 7215.9000 -Other 3 20 72.16 Angles, shapes and sections of iron or non-alloy steel: -U, I or H sections, not further worked than hot- rolled, hot-drawn or extruded, of a height of less than 80 mm: 7216.1010 ---H sections 3 14 7216.1090 ---Other 3 14 -L or T sections, not further worked than hot-rolled, hot-drawn or extruded, of a height of less than 80 mm: 7216.2100 --L sections 6 17 7216.2200 --T sections 6 14 -U, I or H sections, not further worked , than hot-rolled hot-drawn or extruded of a height of 80 mm or more: 7216.3100 --U sections 6 14 7216.3200 --I sections 6 14 --H sections: 7216.3310 ---Of a height of 200mm or more 6 14 7216.3390 ---Other 6 14 -L or T sections, not further worked than hot rolled, hot-drawn or extruded, of a height of 80 mm or more: 7216.4010 ---L sections 3 17 7216.4020 ---T sections 3 14
-Other angles, shapes and sections, not further worked than hot-rolled, hot- drawn or extruded:
-Angles, shapes and sections, not further worked than cold-formed or cold-finished:
7216.6100 --Obtained from flat-rolled products 3 20 7216.6900 --Other 3 20 -Other: 7216.9100 --Cold-formed or cold- 3 20 finished from flat-rolled products 7216.9900 --Other 3 20 72.17 Wire of iron or non-alloy steel: 7217.1000 -Not plated or coated, 8 40 whether or not polished 7217.2000 -Plated or coated with zinc 8 40 7217.3000 -Plated or coated with other base metals 8 40 Tariff No. Description of Goods Import Duty Rates
332
M.F.N % General % 7217.9000 -Other 8 40 III. -STAINLESS STEEL 72.18 Stainless steel in ingots or other primary forms; semi-finished products of stainless steel: 7218.1000 -Ingots and other primary forms 2 11 -Other: 7218.9100 --Of rectangular (other than square) 2 11 cross-section 7218.9900 --Other 2 11 72.19 Flat-rolled products stainless steel, of a width of 600 mm or more: -Not further worked than hot-rolled, in coils: 7219.1100 --Of a thickness exceeding 4 14 10 mm 7219.1200 --Of a thickness of 4.75 mm 4 14 or more but not exceeding 10 mm 7219.1300 --Of a thickness of 3 mm or 4 14 more but less than 4.75 mm 7219.1400 --Of a thickness of less 4 14 than 3 mm -Not further worked than hot-rolled, not in coils: 7219.2100 --Of a thickness exceeding 11.8 40 10 mm 7219.2200 --Of a thickness of 4.75 mm 11.8 40 or more but not exceeding 10 mm 7219.2300 --Of a thickness of 3 mm or 11.8 40 more but less than 4.75 mm --Of a thickness of less than 3 mm: 7219.2410 ---Of a thickness exceeding 11.8 40 1mm, but less than 3 mm 7219.2420 ---Of a thickness of 0.5 mm 11.8 40 or more but not exceeding 1mm 7219.2430 ---Of a thickness of less than 0.5mm 11.8 40 -Not further worked than cold rolled (cold-reduced) 7219.3100 --Of a thickness of 4.75 mm or more 12 40 7219.3200 --Of a thickness of 3 mm or more 12 40 but less than 4.75 mm 7219.3300 --Of a thickness exceeding 2 40 l mm but less than 3mm 7219.3400 --Of a thickness of 0.5 mm or more 12 40 but not exceeding l mm 7219.3500 --Of a thickness of less than 0.5 mm 12 40 7219.9000 Other 12 40 72.20 Flat-rolled products stainless steel, of a width of less than 600 mm: -Not further worked than hot-rolled: 7220.1100 Of a thickness of 4.75 mm or more 10 20 7220.1200 Of a thickness of less than 4. 75mm 10 20 -Not further worked than cold-rolled (cold-reduced) 7220.2010 ---Of a width of less than 10 20 300 mm 7220.2090 ---Other 10 20 7220.9000 -Other 10 20 Tariff No. Description of Goods Import Duty Rates M.F.N % General %
333
72.21 Bars and rods, hot-rolled, in irregularly wound coils, of stainless steel: 7221.0000 Bars and rods, hot-rolled in, irregularly 10 20 wound coils, of stainless steel 72.22 Other bars and rods of stainless steel; angles, shapes and sections of stainless steel: -Bars and rods, not further worked than hot-rolled, hot-drawn or extruded: 7222.1100 --Of circular cross-section 12.2 40 7222.1900 --Other 12.2 40 7222.2000 -Bars and rods, not further worked 12.4 40 than cold formed or cold-finished 7222.3000 -Other bars and rods 12.4 40 7222.4000 -Angles, shapes and sections 10 17 72.23 Wire of stainless steel: 7223.0000 Wire of stainless steel 10 20 IV. -OTHER ALLOY STEEL HOLLOW DRILL BARS AND RODS, OF ALLOY OR NON-ALLOY STEEL 72.24 Other alloy steel in ingots or other primary forms; semi-finished products of other alloy steel: 7224.1000 -Ingots and other primary forms 2 11 -Other: 7224.9010 Raw casting forging stocks, individual 2 11 piece weight of 10 tonne or more 7224.9090 ---Other 2 11 72.25 Flat-rolled products of other alloy steel, of width of 600 mm or more: -Of silicon-electrical steel: 7225.1100 --Grain-oriented 3 20 7225.1900 --Other 6 20 7225.2000 -Of high speed steel 3 17 7225.3000 -Other, not further worked than 3 14 hot-rolled, not in coils 7225.4000 -Other, not further worked 3 17 than hot-rolled not in coils 7225.5000 -Other, not further worked 3 17 than cold-roll (cold- reduced) -Other: 7225.9100 --Electrolytically plated or coated with 7 17 7225.9200 --Otherwise plated or coated with zinc 7 17 7225.9900 --Other 7 17 72.26 Flat-rolled products of other alloy steel, of width of less than 600 mm: -Of silicon-electrical steel: 7226.1100 --Grain-oriented 3 20 7226.1900 --Other 3 20 7226.2000 -Of high speed steel 3 20 -Other: 7226.9100 --Not further worked than 3 20 hot-rolled 7226.9200 --Not further worked than 3 20 cold-rolled (cold- reduced) Tariff No. Description of Goods Import Duty Rates M.F.N % General % 7226.9300 --Electrolytically plated 7 20
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or coated with zinc 7226.9400 --Otherwise plated or 7 20 coated with zinc 7226.9900 --Other 7 20 72.27 Bars and rods, hot-rolled, in irregularly wound coils, of other alloy steel: 7227.1000 -Of high speed steel 3 20 7227.2000 -Of silico-manganese steel 6 20 7227.9000 -Other 3 20 72.28 Other bars and rods of other alloy steel; angles, shapes and sections, of alloy steel; hollow drill bars and rods, of alloy or non-alloy steel: 7228.1000 -Bars and rods, of high speed steel 3 20 7228.2000 -Bars and rods, of silico-manganese steel 6 20 7228.3000 -Other bars and rods, not further worked 3 20 than hot- rolled, hot-drawn or extruded 7228.4000 -Other bars and rods, not further worked 3 20 than forged 7228.5000 -Other bars and rods, not further worked 3 20 than cold formed of cold-finished 7228.6000 -Other bars and rods 3 20 -Angles, shapes and sections: 7228.7010 ---Shapes of crawler tread 6 17 7228.7090 ----Other 6 17 7228.8000 -Hollow drill bars and rods 7 35 72.29 Wire of other alloy steel 7229.1000 -Of high speed steel 4.8 20 7229.2000 -Of silico-manganese steel 7 20 7229.9000 -Other 7 20
China's Import Duty Rates for Iron and Steel Articles from 1 January 2003:
(Sources: The Customs General Administration of the P.R.C, cited in CEIS 0321, 2003, arts 021, 022, 023, 024, 025, 026, 027, 028 Tariff No. Description of Goods Import Duty Rates M.F.N % General % 73.01 Sheet piling of iron or steel, whether or not drilled, punched or made from assembled elements; welded angles, shapes and sections, of iron or steel: 7301.1000 - Sheet piling 7 20 7301.2000 - Angles, shapes and sections 7 30 73.02 Railway or tramway track construction material
of iron or steel, the following: rails, check rails and rack rails, switch blades, crossing frogs, point rods and other crossing pieces, sleepers (cross-ties), fish-plates, chairs chair wedges, sole plates (base plates), clips, bedplates, ties and other material specialised for jointing or fixing rails:
7302.1000 Rails 6 14 Tariff No. Description of Goods Import Duty Rates M.F.N % General % 7302.3000 - Switch blades, crossing frogs, 8 17 point rods other crossing pieces
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7302.4000 - Fish-plates and sole plates 7 17 - Other: 7302.9010 Sleepers (cross-ties) 6 14 7302.9090 - Other 7 17 73.03 Tubes, pipes and hollow profiles, of cast iron 7303.0010 - Tubes and pipes of circular cross-section, 4 40 of the internal diameter of 500 mm or more 7303.0090 - Other 6 40 73.04 Tubes, pipes and hollow profiles, seamless, of iron (other than cast iron) or steel: - Line pipe of a kind used for oil or gas pipelines: 7304.1010 - 215.9 mm =< external 5 17 diameter =< 406.4 mm 7304.1020 -- 114.3 mm < external 5 17 diameter < 215.9 mm 7304.1030 - External diameter <= 114.3 mm 5 17 7304.1090 - Other 5 17 - Casing, tubing and drill pipe, of a kind used in drilling for oil or gas: -- Drill pipe: 7304.2110 External diameter <= 168.3 mm 4 17 7304.2190 - Other 4 17 7304.2900 Other 4 17
- Other, of circular cross section, of iron or non alloy steel: - --Cold-drawn or cold- rolled (cold-reduced):
7304.3110 Boiler tubes and pipes 4 17 7304.3120 Geological casing and drill pipes 8 17 7304.3190 Other 4 37 -- Other: 7304.3930 - Boiler tubes and pipes 4 17 7304.3920 Geological casing and drill pipes 5 17 7304.3990 - Other 4 17 Other, of circular cross-of stainless Steel:--Cold drawn or cold-rolled (cold-reduced): 7304.4110 Boiler tubes and pipes 10 17 7404.4190 - Other 10 40 -- Other: 7304.4910 Boiler tubes and pipes 10 17 7304.4990 - Other 10 40
- Other, of circular cross section, of other alloy steel: - --Cold drawn or cold-rolled (cold reduced):
7304.5110 Boiler tubes and pipes 4 17 7304.5120 - Geological casing and drill pipes 4 17 7304.5190 Other 4 17 -- Other: 7304.5910 Boiler tubes and pipes 4 17 7304.5920 Geological casing and drill pipes 4 17 7304.5990 Other 4 17 7304.9000 Other 4 17 Tariff No. Description of Goods Import Duty Rates M.F.N % General % 73.05 Other tubes and pipes (for example, welded, riveted or similarly closed), having circular cross-sections, the external diameter of which
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exceeds 406.4 mm, of iron or steel:- Line pipe of a kind used for oil or gas pipelines 7305.1100 Longitudinally submerged arc welded 7 17 7305.1200 Other, longitudinally welded 3 17 7305.1900 Other 7 17 7305.2000 Casing of a kind used in drilling for oil 7 17 or gas Other, welded: 7305.3100 Longitudinally welded 6 30 7305.3900 Other 6 30 7305.9000 Other 6 30 73.06 Other tubes, pipes and hollow profiles (for example, open seam or welded, riveted or similarly closed), of iron or steel: 7306.1000 Line pipe of a kind used for oil 7 17 or gas pipelines 7306.2000 Casing and tubing of a kind used in 3 17 drilling for oil or gas 7306.3000 Other, welded, of circular cross-section, 3 30 of iron or non-alloy steel 7306.4000 - Other, welded, of circular cross-section 6 30 of stainless steel 7306.5000 Other, welded, of circular cross-section, 3 30 of other alloy steel 7306.6000 - Other, welded, of non-circular 3 30 cross-section 7306.9000 - Other 6 30 73.07 Tube or pipe fittings (for example, coupling, elbows, sleeves), of iron or steel: Cast fittings: 7307.1100 Of non-malleable cast iron 5 20 7307.1900 Other 8 20 - Other, of stainless steel: 7307.2100 Flanges 8.4 20 7307.2200 Threaded elbows, bends and sleeves 8.4 20 7307.2300 Butt welding fittings 8.4 20 7307.2900 Other 8.4 20 - Other: 7307.9100 Flanges 7 20 7307.9200 Threaded elbows, bends and sleeves 4 20 7307.9300 Butt welding fittings 7 20 7307.9900 Other 4 20 73.08 Structures (excluding prefabricated of heading No.94.06) and parts of
structures (for example, bridges and bridge-sections, lock-gates, towers, lattice masts, roofs, roofing frameworks, doors and windows frames and thresholds for doors, shutters, balustrades, pillars and columns), of iron or steel; plates, rods, angles, shapes, plates, rods, angles, shapes, section, tubes and the like, prepared for use in structures, of iron or steel:
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Tariff No. Description of Goods Import Duty Rates M.F.N % General % 7308.1000 - Bridges and bridge-sections 8 30 7308.2000 Towers and lattice masts 8.4 30 7308.3000 Doors, windows and their frames 13 50 7308.4000 -Equipment for scaffolding, shuttering 8.4 30 , propping or pit-propping 7308.9000 -Other 6.1 30 73.09 Reservoirs, tanks, vats and similar containers for any material (other than compressed or liquefied gas), of iron or steel, of a capacity exceeding 300 litres whether or not lined or heat insulated, but not fitted with mechanical or thermal equipment: 7309.0000 Reservoirs, tanks, vats and similar 10.5 35
containers for any material (other than compressed or liquefied gas), of iron or steel, of a capacity exceeding 300 Litre, whether or not lined or heat insulated, but not fitted with mechanical or thermal equipment
73.10 Tanks, casks, drums, cans, boxes and similar containers, for any material (other than compressed or liquefied gas), of iron or steel, of a capacity not exceeding 300 Litre, whether or not lined or heat- insulated, but not fitted with mechanical or thermal equipment. 7310.1000 -Of a capacity of 50 Litre or more 10.5 40 -Of a capacity of less than 50 Litre 7310.2100 Cans which are to be closed by 17.5 70 soldering or crimping 7310.2900 --Other 17.5 70 73.11 Containers for compressed or liquefied gas of iron or steel: 7311.0010 -For retail packing 17.5 70 7311.0090 ---Other 8 17 73.12 Stranded wire, ropes, cables, plaited bands, slings and the like, of iron or steel, not electrically insulated: 7312.1000 -Stranded wire, ropes and cables 4 20 7312.9000 -Other 4 20 73.13 Barbed wire of iron or steel; twisted hoop or single flat wire, barbed or not, and loosely twisted double wire, of a kind used for fencing, of iron or steel: 7313.0000 Barbed wire of iron or steel; twisted 7 70
hoop or single flat wire, barbed or not, and loosely twisted double wire, of a kind used for fencing, of iron or steel
73.14 Cloth (including endless bands), grill, netting and fencing, of iron or steel wire; expanded metal of iron or steel:-Woven cloth: --Endless bands for machinery, of stainless steel: 7314.1210 ---For technical use 12 20 7314.1290 ---Other 12 70 --Other endless bands for machinery: 7314.1310 ---For technical use 8 20 7314.1390 Other 12 70 --Other woven cloth, of stainless steel: 7314.1410 For technical use 12 20 Tariff No. Description of Goods Import Duty Rates
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M.F.N % General % 7314.1490 ---Other 12 70 --Other: 7314.1910 For technical use 7 20 7314.1990 Other 12 70 7314.2000 -Grill, netting and fencing, welded at the 7 7
intersection of wire with a maximum cross- sectional dimension of 3 mm or more and having a mesh size of 100 sq cm or more
-Other grill, netting and fencing, weld the intersection: 7314.3100 --Plated or coated with zinc 7 70 7314.3900 --Other 7 70 -Other grill, netting and fencing: --Plated or coated with zinc: 7314.4110 ---For technical use 8 20 7314.4190 Other 10 70 --Coated with plastics: 7314.4210 For technical use 8 20 7314.4290 ---Other 10 70 --Other: 7314.4910 ---For technical use 8 20 7314.4990 Other 10 70 7314.5000 Expanded metal 8 70 73.15 Chain and parts thereof, of iron or steel: -Articulated link chain and parts thereof: --Roller chain: 7315.1110 ---For bicycles 12 80 7315.1120 For motorcycles 12 80 7315.1190 -Other 12 80 7315 1200 --Other chain 12 80 7315.1900 --Parts 12 80 7315.2000 -Skid chain 12 80 -Other chain: 7315.8100 --Stud-link 12 80 7315.8200 --Other, welded link 12 80 7315.8900 --Other 12 80 7315.9000 -Other parts 10 80 73.16 Anchors, grapnels and parts thereof, of iron or steel: 7316.0000 Anchors, grapnels and parts thereof, 10 40 of iron or steel 73.17 Nails, tacks, drawing pins, corrugated nails, staples (other than those of heading No.83.05) and similar articles, of iron or steel, whether or not with heads of other material, but excluding such articles with heads of copper: 7317.0000 Nails, tacks, drawing pins, corrugated 10 80
nails, staples (other than those of heading No.83.05) and similar articles, of iron or steel, whether or not with heads of other material, but excluding such articles with heads of copper
73.18 Screws, bolts, nuts, coach screws, screw books, rivets, cotters, cotter-pins, washers (including spring washers) and similar articles, of iron or steel:
-Threaded articles: 7318.1100 --Coach screws 10 80 Tariff No. Description of Goods Import Duty Rates M.F.N % General %
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7318.1200 --Other wood screws 10 80 7318.1300 --Screw hooks and screw 10 80 rings 7318.1400 --Self-tapping screws 10 80 7318.1500 --Other screws and 8 80 bolts, whether or not with their nuts or washers 7138.1600 --Nuts 8 80 7318.1900 --Other 5 80 -Non-threaded articles: 7318.2100 --Spring washers and other lock washers 10 80 7318.2200 --Other washers 10 80 7318.2300 --Rivets 10 80 7318.2400 --Cotters and cotter-pins 10 80 7318.2900 --Other 10 80 73.19 Sewing needles, knitting needles, bodkins, crochet hooks, embroidery stilettos and similar articles, for use in the hand, of iron or steel: safety pins and other pins of iron or steel, not elsewhere specified or included: 7319.1000 -Sewing, darning or embroidery needles 10 80 7319.2000 -Safety pins 10 90 7319.3000 -Other pins 10 90 7319.9000 -Other 10 80 73.20 Springs and leaves for springs, of iron or steel -Leaf-springs and leaves thereof: 7320.1010 ---For railway 6 14 locomotives and rolling stock 7320.1090 ---Other 10 50 -Helical springs: 7320.2010 ---For railway 6 14 locomotives and rolling stock 7320.2090 ---Other 10 50 -Other: 7320.9010 ---For railway 6 14 locomotives and rolling stock 7320.9090 ---Other 12 50 73.21 Stoves, ranges, grates, cookers (including those with subsidiary boilers for
central heating), barbecues, braziers, gas-rings, warmers and similar non-electric domestic appliances, and parts thereof, of iron or steel: -Cooking appliances and plate warmers:
7321.1100 --For gas fuel or for both gas and other 15 80 --For liquid fuel: 7321.1210 ---Kerosene cooking stoves 21 80 7321. 290 ---Other 21 80 7321.1300 --For solid fuel 21 80 -Other appliances: 7321.8100 --For gas fuel or for both gas 23 80 and other fuels 7321.8200 --For liquid fuel 21 80 7321.8300 --For solid fuel 21 80 7321.9000 -Parts 12 80
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Tariff No. Description of Goods Import Duty Rates M.F.N % General % 73.22 Radiators for central heating, not electrically heated, and parts thereof, of iron
or steel; air heaters and hot air distributors (including distributors which can also distribute fresh or conditioned air), not electrically heated, incorporating a motor-driven fan or blower, and parts thereof, of iron or steel:
-Radiators and parts thereof: 7322.1100 --Of cast iron 21 80 7322.1900 --Other 21 80 7322.9000 -Other 20 80 73.23 Table, kitchen or other household articles and parts thereof, of iron or steel;
iron or steel wool; pot scourers and scouring or polishing pads, gloves and the like, of iron or steel:
7323.1000 -Iron or steel wool; pot scourers and 14 80 scouring or polishing pads, gloves and the like -Other: 7323.9100 --Of cast iron, not enamelled 20 80 7323.9200 --Of cast iron, enamelled 20 100 7323.9300 --Of stainless steel 12 80 --Of iron (other than cast iron) or steel, enamelled 7323.9410 ---Mixing pans 20 100 7323.9420 ---Cooking pans 20 100 7323.9430 ---Roasting stove 20 100 7323.9490 ---Other 20 100 7323.9900 --Other 20 80 73.24 Sanitary ware and parts thereof, of iron or steel: 7324.1000 -Sinks and wash basins, of stainless steel 18 80 -Baths: 7324.2100 --Of cast iron, whether or not enamelled 16.7 100 7324.2900 --Other 30 100 7324.9000 -Other, including parts 25 100 73.25 Other cast articles of iron or steel: -Of non-malleable cast iron: 7325.1010 ---For technical use 7 40 7325.1090 ---Other 20 90 -Other: 7325.9100 --Grinding balls and similar articles 10.5 40 for mills --Other: 7325.9910 ---For technical use 10.5 40 7325.9990 ---Other 20 90 73.26 Other articles of iron or steel: -Forged or stamped, but not further worked: 7326.1100 --Grinding balls and similar articles 10.5 40 for mills --Other: 7326.1910 ---For technical use 10.5 40 7326.1990 ---Other 20 90 -Articles of iron or steel wire: 7326.2010 ---For technical use 10 40 7326.2090 ---Other 18 90 -Other: 7326.9010 ---For technical use 10.5 40 7326.9090 ---Other 10.4 90
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9.18 China Steel companies Data base
(Sources: China Steel Statistics, 2000, 2001 and 2002 and Iron & Steel Works of the World, Edition 14, 2001, pp.73 and various publications)
Producer Name Address Province
Angang Anshan Iron & Steel Company Tiexi District, Anshan City, Liaoning 114021 Liaoning
Anyang Anyang Iron & Steel Group
Company Limited
Meiyuanzhuang, Tiexi District, Anyang City,
Henan 455004 Henan
Baogang Baotou Iron & Steel Company Kundulun District, Baotou City, Inner
Mongolia Autonomous Region 014010 Neimenggu
Baoshan Baoshan Iron & Steel CompanyFujin Road, Baoshan District, Shanghai City
201900 Shanghai
Beigang Beigang Group Company LimiteHongan Street, Fulaerji District, Qiqihaer City,
Helongjiang 161041 Helongjiang
Beitai Beitai Iron & Steel General WorkBetai Town, Pingshan District, Benxi City,
Liaoning 117017 Liaoning
Bengang Benxi Iron & Steel Company Renmin Road, Pingshan District, Benxi City,
Liaoning 117000 Liaoning
Changgang Changzhi Iron & Steel Group
Company Limited
Guxian Village, Changzhi City, Shanxi
046031 Shanxi
Changte Changcheng Special Steel
(Group) company Limited
Sanhe Street, Jiangyou City, Sichuan
621701 Sichuan
Chengdu Chengdu Iron & Steel Works Tuanjie Street (South Section), Qingbaijiang
District, Chengdu City, Sichuan 610303 Sichuan
Chenggang Chengde Iron & Steel Group
Company Limited
Luanhe Town, Shuangluan District, Chengde
City, Hebei 067002 Hebei
Chengwu Chengdu Seamless Steel Tube
Plant
Dongfeng Road (south Section), Jinjiang
District, Chengdu City, Sichuan 6110069 Sichuan
Chonggang Chongqing Iron & Steel Group
Company Limited Dadukou District, Chongqing City, 400081 Chongqing
Chongte Chongqing Special Steel Group
Company Limited
Suangbei Street, Shapingba District,
Chongqing City, 630032 Chongqing
Daerzha Dalian No 2 Steel Rolling Mill Zhoushuizi, Ganjijngzi District, Dalian City,