growth in china and its impact on the global raw materials ... · growth in china and impact on...
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© 2012 SteelConsult International Page www.steelconsult.com
1
Growth in China and its
impact on the global raw
materials market
27 September 2012
Platts SBB Steel Raw Materials Europe Conference 2012
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2
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Growth in China and Impact on Global Raw Materials Market
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Growth in China and Impact on Global Raw Materials Market
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Growth in China and Impact on Global Raw Materials Market – Contents
Contents
• Impact of China on raw materials market
• Short term outlook
• Long term outlook
• Conclusions
© 2012 SteelConsult International Page www.steelconsult.com
5
Source: WSA, CLSA Asia-Pacific Markets, Tex Report, SteelConsult
Growth in China and Impact on Global Raw Materials Market – Impact
China has an important impact on both demand and supply of iron ore. With regard to demand, it has increased its share of the global seaborne iron ore market from ~5% in 1990 to ~60% today
14 1925 33
37 41 4455 52 55
70 92 111148
208 275326
383444
628
619687
0
200
400
600
800
1,000
1,200
1,400
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11
Japan Europe
Other East Asia China
ROW
Imports of iron ore (mln tonnes)
© 2012 SteelConsult International Page www.steelconsult.com
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Source: WSA, CLSA Asia-Pacific Markets, Tex Report, SteelConsult
Note: * rich ore equivalent
Growth in China and Impact on Global Raw Materials Market – Impact
In addition to being the world’s largest importer of iron ore, China is also one of the largest producers. Its impact on the global supply/demand balance is compounded by volatile switches between domestic supply of ore and imports
111 105 102 109
208 214
285
356
400
321
234
360
336
5570
92111
148
208
275
326
384
444
628 619
687
0
100
200
300
400
500
600
700
800
'99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11
China domestic production*
China imports
Chinese consumption of iron ore by origin (mln tonnes)
67%
60%
53%49%
58%
51% 51% 52% 51%
42%
27%
37%33%
33%
40%
48%51%
42%
49% 49% 48% 49%
58%
73%
63%67%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
'99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11
China imports
China domestic production*
Chinese consumption of iron ore by origin (%)
Chinese mills switched
massively from domestic
ore to more imports, as
international ore prices fell
sharply in crisis year 2009
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0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
'80
'81
'82
'83
'84
'85
'86
'87
'88
'89
'90
'91
'92
'93
'94
'95
'96
'97
'98
'99
'00
'01
'02
'03
'04
'05
'06
'07
'08
'09
'10
'11
'12Y
TD
0
50
100
150
200
250
300
Consumption Price
Global consumption of iron ore (mln tonnes)
Source: Tex report, SBB, SteelConsult analysis
Growth in China and Impact on Global Raw Materials Market – Impact
Between 1970-2002, the world had plenty of iron ore mining capacity. In 2002 and 2003, world mining capacity could still cope with rising Chinese demand, it was only from 2004 that prices started to surge, as a direct impact of booming Chinese steel production
Price (US$/dmtu)
Chinese government
reforms housing market
promoting private home
ownership…
Chinese steel
consumption
takes off…
Global iron ore
prices start to
surge
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Growth in China and Impact on Global Raw Materials Market – Contents
Contents
• Impact of China on raw materials market
• Short term outlook
• Long term outlook
• Conclusions
© 2012 SteelConsult International Page www.steelconsult.com
0
20
40
60
80
100
120
140
J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A
0
20
40
60
80
100
120
140
China
EU, NAFTA & Japan
World
9
Growth in China and Impact on Global Raw Materials Market – Short Term Outlook
In contrast to the mature markets, Chinese steel output has continued to rise firmly, but production fell sharply in August and further production cuts seem likely
Crude steel output, index (May 2008 = 100)
Source: WSA, SteelConsult
2008 2009 2010 2011 2012
© 2012 SteelConsult International Page www.steelconsult.com
40
45
50
55
60
J F M A M J J A S O N D J F M A M J J A S*
Brazil
Russia
India
China
PMI balance point
10
Source: Markit, HSBC
Note: * flash
Manufacturing PMI Index
Growth in China and Impact on Global Raw Materials Market – Short Term Outlook
Chinese Manufacturing PMI continues to struggle below 50, showing the weakest performance of the BRIC countries
2011 2012
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Source: EIU
Growth in China and Impact on Global Raw Materials Market – Short Term Outlook
Inflation in China has fallen to 2%, but remains a point of concern for the Chinese government
Inflation rate China (consumer prices, YoY% change)
-4%
-2%
0%
2%
4%
6%
8%
10%
J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A
2007 2008 2009 2010 2011 2012
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Growth in China and Impact on Global Raw Materials Market – Short Term Outlook
China’s steel demand is mainly driven by the construction sector, which accounts for almost 50% of total consumption
0
100
200
300
400
500
600
700
'05 '06 '07 '08 '09 '10 '11
Construction Machinery
Automobile Shipbuilding
Appliance Other
Steel consumption China by sector (mln tonnes)
Source: CLSA Asia-Pacific Markets
6%
14%
17%
5%48%
9%
Construction
Machinery
Automobile
Shipbuilding
Appliance
Other
Steel consumption China by sector, 2011 (%)
© 2012 SteelConsult International Page www.steelconsult.com
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Source: WSA, SteelConsult
9.4%
-2.9%
2.8% 3.0%
8.0%
-1.4%
9.5%
5.1%
-3.5%
-23.7%
21.2%
5.1%
-0.9%
0.8%1.4%
27.1%
21.1%
25.7%
14.7%
26.0%
8.7%10.8%
6.8%
23.4%
6.6% 6.2%
2.0%
5.0%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12f '13f
ROW China
Growth in China and Impact on Global Raw Materials Market – Short Term Outlook
As construction and shipbuilding activities slow down in China, demand is expected to cool down to 2% in 2012 and 5% in 2013, though remain well above growth levels in the Rest of the World
YoY growth in steel consumption (%)
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Source: WSA, SteelConsult
1.6%
6.5%
8.2%
6.3%
9.2%
7.0%
0.0%
-6.4%
14.1%
5.6%
0.4%
2.7%
10.1%
7.6%
-10%
-5%
0%
5%
10%
15%
20%
'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12f '13f
Av. growth 1950-2011: 3.7% p.a.
YoY growth in global steel consumption (%)
Growth in China and Impact on Global Raw Materials Market – Short Term Outlook
Global steel consumption is expected to increase by only 0.4% in 2012, and 2.7% in 2013, well below its long term growth rate
© 2012 SteelConsult International Page www.steelconsult.com
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Growth in China and Impact on Global Raw Materials Market – Contents
Contents
• Impact of China on raw materials market
• Short term outlook
• Long term outlook
• Conclusions
© 2012 SteelConsult International Page www.steelconsult.com
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0
500
1,000
1,500
2,000
2,500
'20
'22'2
4'2
6'2
8'3
0'3
2'3
4'3
6'3
8'4
0'4
2'4
4'4
6'4
8'5
0'5
2'5
4'5
6'5
8'6
0'6
2'6
4'6
6'6
8'7
0'7
2'7
4'7
6'7
8'8
0'8
2'8
4'8
6'8
8'9
0'9
2'9
4'9
6'9
8'0
0'0
2'0
4'0
6'0
8'1
0'1
2'1
4'1
6'1
8'2
0'2
2'2
4'2
6'2
8'3
0'3
2'3
4'3
6'3
8'4
0'4
2'4
4'4
6'4
8'5
0
Global consumption of finished steel (mln tonnes)
Source: WSA, USGS, SteelConsult analysis
Growth in China and Impact on Global Raw Materials Market – Long Term Outlook
The growth in global steel use seen before 2000 was driven by the development of 1bn consumers in North America, Europe and Japan... since 2001 growth has been mainly driven by 1.3bn consumers in China. How much further growth potential does China have?
1920-
1929
CAGR
5.8%
1929-1945
CAGR -0.4% 1945-1974
CAGR 6.5%
1974-2001
CAGR 1.0%
2001-2011
CAGR
6.0%
Roaring
twenties Great Depression
& WWII
1 billion people in North
America, Europe, Soviet Union
and Japan (re)building
infrastructure and developing
steel intensive lifestyles
Steel consumption growth
declines as Soviet Union
collapses and demand in now
mature markets of the Atlantic
Basin and Japan shifts from
expansion and first time buying
to replacement and repair &
maintenance markets
1.3bn people in China
building infrastructure
and developing steel
intensive lifestyles…
?
…and 1.2bn in India…
…and 2bn in SE Asia, Latin
America and Africa
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Source: United Nations Population Statistics
Growth in China and Impact on Global Raw Materials Market – Long Term Outlook
A number of fundamentals suggest Chinese steel consumption still has some way to grow. Urbanization, for example, will continue over the next decades, though, since 2010, at an ever declining rate
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
1990 1995 2000 2005 2010 2015 2020 2025 2030 2035
Urban Rural
Population growth China (average YoY growth, %)
242303
376455
556
660762
846912 958 984
815
842
838
814
752
681
608541
484 435 397
0
200
400
600
800
1,000
1,200
1,400
1,600
1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035
Urban Rural
Urbanization China (mln people)
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0
200
400
600
800
0 10,000 20,000 30,000 40,000 50,000 60,000
0
200
400
600
800
Finished steel consumption/capita (kg), 2010
GDP(PPP)/capita (US$), 2011
Germany
USA
Brazil
India
Japan
Source: WSA, CIA, Tata Steel Construction Centre NL, SteelConsult
Malaysia
World average
China
EU-27
Long term OECD average (415kg/head)
Growth in China and Impact on Global Raw Materials Market – Long Term Outlook
Steel markets typically develop along an S-curve. The shape and peak of the curve varies considerably by country...
Thailand
Philippines
Vietnam
Indonesia Emerging
Mature
Example of typical S-curve of a
developing steel market
Steel demand booms as a result of
infrastructure and industrial
development, first time buyers of
cars, appliances etc.
Focus of the economy on industry
Steel demand slows down and
stabilizes, based mainly on construction
replacement and repair & maintenance,
replacement of cars, appliances etc.
Focus of economy on services sector
Steel demand low, focus of economy on
agricultural sector
© 2012 SteelConsult International Page www.steelconsult.com
19
0
200
400
600
800
1,000
1,200
1,400
'67 '69 '71 '73 '75 '77 '79 '81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11
China Germany Japan South Korea
Consumption of finished steel per capita (kg/head)
Source: WSA, SteelConsult analysis
Growth in China and Impact on Global Raw Materials Market – Long Term Outlook
How far has China progressed with its economic development and when and at what level will its steel consumption peak? Other now developed countries peaked at 550-750kg/head in the past
South Korean peak
1,211kg/head (2007)
Japanese peak
752kg/head (1990)
German peak
541kg/head (1969)
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20
Growth in China and Impact on Global Raw Materials Market – Long Term Outlook
May China peak at similar steel consumption levels as other countries in the past? Weight reductions imply a significant downside impact…(1)
• Important weight savings are well known to have been realized in the use of steel in cars (thinner
gauges, lower losses, new technologies (hydroforming/TWBs)), beverage and food cans (-30% over
the last 30 years as a result of thinner gauges, concave bottoms, curved necks, rims etc.), and many
other products.
• In addition, considerable savings have also been realized in the use of steel in construction, which
accounts for about half of Chinese steel demand. Indeed, over the last decades steel intensity in
construction has been reduced by three factors:
• Better steel grades
• Better design, fabrication and application of steel products
• And better design of buildings and structures
• Better steel grades:
High strength (and thus thinner) steels, weldable steels, less impurities. Indeed, high strength rebar
used today has a yield strength of 500 MPa compared to 250 MPa in the 1950s, roughly implying a
50% reduction in weight required.
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Growth in China and Impact on Global Raw Materials Market – Long Term Outlook
May China peak at similar steel consumption levels as other countries in the past? Weight reductions imply a significant downside impact…(2)
• Better design, fabrication and application of steel products:
• Rebar and mesh wire rod: longer lengths, fit for purpose, superior rebar patterns with more
grip, use of pre-stressed rebar, less overlap required, weldable qualities, prefab products with
lower scrap losses, better cement qualities requiring less reinforcement/m3 and less m3 to be
reinforced.
• Sections and merchant bars: longer lengths, fit for purpose, asymmetrical shapes, parallel
flanges instead of tapered, sharp corners, less overlap in application, welding instead of
rivetting, prefab with lower scrap losses.
• And better design of buildings and structures:
• Better/optimized design of buildings and structural strength, better understanding of
behaviour and robustness, better understanding of wearing and fatigue, less
“overspecification” for safety precaution. Especially for (high rise) buildings and structures
using sections and merchant bars, but also for reinforced concrete.
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Growth in China and Impact on Global Raw Materials Market – Long Term Outlook
The Eiffel Tower, for example, today could be built using only a third of the steel (wrought iron) used in 1889
• The Eiffel Tower, for example, today could be built using only a third of the steel tonnage (wrought
iron) used in 1889*.
• However, the most substantial weight gains in the use of steel were already booked before the
1945-1975 period.
• Furthermore, weight gains in steel are often partially compensated by extra weight elsewhere
(larger dimensions for longer durability, more focus on design, aesthetics and prestige, rather than
mere functionality).
Eiffel Tower: 319m high,
7,300tonnes of steel (wrought iron)
ArcelorMittal Orbit: 115m high,
1,400tonnes of steel
Source: *Tata Steel Construction Centre NL, AISI
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Growth in China and Impact on Global Raw Materials Market – Long Term Outlook
May China peak at similar steel consumption levels as other countries in the past? On the other hand, the high penetration of steel in various Chinese construction segments suggests a considerable upside compensating for lower steel weight
• Whilst considerable weight savings have been realized over time in the use of steel, the steel
intensity of construction in China is still relatively high from another perspective, as China has a high
proportion of high rise buildings, which require more steel on a relative basis.
• Indeed, high rise buildings consume upto 5 times as much steel per square meter of floor as low-
rise buildings.
• Furthermore, China uses significantly more steel in the residential construction sector, which has
more high rise apartment buildings, and accounts for 34% of total Chinese construction related steel
consumption.
© 2012 SteelConsult International Page www.steelconsult.com
105 87 101103111123124158
191240
276
348378
418447
551588
624637668
701734
767800
833851868886904
797
0
100
200
300
400
500
600
700
800
900
1,000
'94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11'12*'13*'14*'15*'16*'17*'18*'19*'20*'21*'22*'23*'24*'25*'26*'27*'28*'29*'30*'31*'32*'33*'34*'35*
Source: WSA, SteelConsult
Finished steel consumption (mln tonnes)
Growth in China and Impact on Global Raw Materials Market – Long Term Outlook
The Chinese steel market is to continue to grow, though more slowly in the next decade, and is expected to peak at ~900m tonnes in the early 2020s
24
CAGR 3.4% CAGR 15.8%
Assumption: China achieving consumption
peak of 650kg/head by 2022
Assumption: Chinese consumption
falling to 575kg/head by 2035
CAGR -1.0%
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25
Growth in China and Impact on Global Raw Materials Market – Long Term Outlook
China has over US$3 trillion of foreign reserves. Though these are only partially available, they still provide a considerable buffer for potential further stimulus, if and when required
30 44 21 22 53 75 107 143 149 146 166 212286
403
610
819
1,068
1,528
1,946
2,399
2,847
3,181
586
157
0
500
1,000
1,500
2,000
2,500
3,000
3,500
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11
Source: IMF, China State Administration of Foreign Exchange
Note: Excl. gold, end of year figures
Foreign reserves China, US$bn
Stimulus
package
2009
Stimulus
package
2012
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26
Source: SteelConsult analysis
Note: *including credits for offgases
Operational production cost/t slab/billet, US$/t, 2012 Q1-Q3
Growth in China and Impact on Global Raw Materials Market – Long Term Outlook
Chinese steel mills are competitive in their own domestic market, but not sufficiently competitive to be major structural exporters of steel to the world market. Chinese steel production is likely to develop in line with domestic demand
426 428 430 404 392363
416
334
30 1242
48
16
61
2626
2725
48 27
16 66 7237
798250
26
0
100
200
300
400
500
600
700
800
EU Coastal EU Inland Brazil Ukraine China USA Turkey (scrap
based EAF)
Middle East (DRI
based EAF)
Raw materials Freight raw materials Labour Other operational production costs and energy*
Integrated mills EAF mills
© 2012 SteelConsult International Page www.steelconsult.com
27
Source: WSA, SteelConsult analysis
Notes: *Calculated as moving average of finished steel consumption during previous 15
years, indicative only
0
500
1,000
1,500
2,000
2,500
'85
'86
'87
'88
'89
'90
'91
'92
'93
'94
'95
'96
'97
'98
'99
'00
'01
'02
'03
'04
'05
'06
'07
'08
'09
'10
'11
'12*
'13*
'14*
'15*
'16*
'17*
'18*
'19*
'20*
'21*
'22*
'23*
'24*
'25*
'26*
'27*
'28*
'29*
'30*
'31*
'32*
'33*
'34*
'35*
Global consumption of finished steel
Global production of crude steel
Global obsolete scrap recovery base*
mln tonnes
Growth in China and Impact on Global Raw Materials Market – Long Term Outlook
Current scrap availability is dependent on steel consumption in the past. Due to China’s rapid surge in steel output in the last decade, the world is facing tightness in scrap. More scrap will become available once China’s scrap cycle catches up with steel output
Obsolete scrap available for recycling is
dependent on finished steel consumption
in the past (used cans, cars, rails, ships,
demolished buildings etc.)
Driven by China, steel production and
consumption have shown unprecedented
growth from 2002, especially in tonnage
terms…
…while obsolete
scrap availability is
restricted by
considerably lower
average finished
steel consumption
during the last 15
years or so...
Scrap
tightness
Scrap abundance
Scrap abundance
…More scrap
becoming
available in
China as steel
intensive
products and
buildings reach
their end-of-life
© 2012 SteelConsult International Page www.steelconsult.com
0.150.170.170.180.190.200.210.240.270.33
0.42
0.54
0.65
0.760.76
0.880.971.011.021.061.10
1.141.181.231.271.291.311.331.35
1.13
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
'94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11'12*'13*'14*'15*'16*'17*'18*'19*'20*'21*'22*'23*'24*'25*'26*'27*'28*'29*'30*'31*'32*'33*'34*'35*
Source: WSA, SteelConsult
Chinese iron ore consumption (mln tonnes)
Growth in China and Impact on Global Raw Materials Market – Long Term Outlook
Though steel production growth will slow down and EAFs and BOFs will likely gradually use more scrap over time, the Chinese steel industry is expected to still require some 350m additional tonnes of iron ore over the coming decade
28
CAGR 2.7% CAGR 15.5%
Assumption: China achieving steel
consumption peak of 650kg/head by 2022
Assumption: Chinese steel consumption
falling to 575kg/head by 2035
CAGR -1.4%
© 2012 SteelConsult International Page www.steelconsult.com
29
Source: CLSA Asia-Pacific Markets, SteelConsult
Growth in China and Impact on Global Raw Materials Market – Long Term Outlook
Most of the extra volumes will need to be imported from overseas, with total Chinese ore imports forecast to reach almost 1bn tonnes in 2016
0
200
400
600
800
1,000
1,200
1,400
1,600
'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16
China ROW
Seaborne imports of iron ore (mln tonnes)
© 2012 SteelConsult International Page www.steelconsult.com
30
Growth in China and Impact on Global Raw Materials Market – Contents
Contents
• Impact of China on raw materials market
• Short term outlook
• Long term outlook
• Conclusions
© 2012 SteelConsult International Page www.steelconsult.com
31
Growth in China and Impact on Global Raw Materials Market – Conclusions
Conclusions
• China has likely already entered a period of slower growth in steel consumption. The country’s
steel demand is expected to grow by only 2% in 2012 and 4.5% in 2013. After recording growth of
15.8% between 2000 and 2011, growth in the next decade is expected to fall back to ~3.5% per
year, on average. This still represents 280m tonnes of extra steel demand, and ~350m tonnes of
extra iron ore demand, most of which will need to be imported.
• Like other, now industrialized countries in the past, Chinese steel consumption will inevitably slow
down and then peak, which we estimate to happen at a level of ~900m tonnes in a decade from
now, and then gradually decline.
• China is not sufficiently competitive to become a major exporter of steel on a structural basis, and
except for some relatively modest net exports, will see steel production develop in line with
domestic demand. However, European mills, and their raw materials suppliers, may still on
occasion be hit by temporary exports of excess steel from China. Any small imbalance in China will
translate to large tonnages hitting the global market. A 10% reduction in capacity utilization in
China equals the entire amount of overcapacity in the CIS in the early nineties, after the collapse of
the former Soviet Union, at any point in time.
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Growth in China and Impact on Global Raw Materials Market – Conclusions
Conclusions
• China will increasingly generate scrap over the next few decades. Whilst part of it will likely be
processed by domestic BOF mills, which today have relatively low scrap rates, and by possible
new EAFs, a considerable part will likely be exported, gradually easing tightness in the global scrap
market.
• A slowdown in China will have mixed consequences for EU steel mills. Gradually declining global
raw materials prices in the coming years will be a relief to EU mills, who export very little to China,
and who are currently sandwiched between weak sales prices for their own products, and high
purchase prices for their raw materials.
• On the other hand, there may an increased risk of regular flares of Chinese steel exports
targeting the EU market. Furthermore, some EU mills, especially the quality leaders, may be hit by
a loss of volume by declining exports to China of high quality steel intensive products, in particular
top end German cars and machinery. Both factors would impact on European demand for
steelmaking raw materials.
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Growth in China and Impact on Global Raw Materials Market
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