Role of the Chinese Steel Industry in the Economic ...fastest growing economies. This bold step was undertaken at times when the global steel industry was burdened with overcapacity

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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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.

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Contents

1 INTRODUCTION...................................................................................................1

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

3.5.1 Gross Domestic Product .........................................................................75 3.5.2 Agriculture & Industrial Production ......................................................78 3.5.3 Money Supply ..........................................................................................82

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 CHINA’S TRADE DEVELOPMENT...............................................................142

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

5.8 STRUCTURAL WEAKNESSES IN ECONOMY .....................................................191 5.8.1 China’s Currency..................................................................................191 5.8.2 Finance - debt levels .............................................................................196 5.8.3 Reform Generated Unemployment – Threat to Economic Stability......205

6 FINDINGS ...........................................................................................................209

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

8 REFERENCES....................................................................................................248

9 APPENDICES .....................................................................................................275

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.

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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?

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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.

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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.

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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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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,

0

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1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002year

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All Europe Former USSR North America

South America Africa and Middle East China

Japan Korea Asia and Oceania

18

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%


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%


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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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

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Japan Russia

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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

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34


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


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

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100,000

120,000

140,000

1972

1974

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Maj

or P

rodu

cers

BO

F S

teel

Pro

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ion

. (t

hous

and

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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.


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


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

countries.

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Reg

iona

l App

aren

t Ste

el C

onsu

mpt

ion

(thou

sand

tonn

es)

European Union 15 Other Europe + USSR Nth America + Sth America Africa + Mexico = Asia Oceania

40

Chart 2.12: Six Leading Producer Countries' Apparent Crude Steel Consumption, 1972-

2001


2.6.2 Per Capita Steel Demand - Six Leading Producer Countries

Another indication of a country’s potential demand for steel is per capita apparent crude

steel consumption. Chart 2.13 shows this indicator for the leading steel producing

countries from 1989 to 2001. By the end of 2001, developed countries such as Japan,

USA and Germany had per capita apparent crude steel consumption values of 600, 400

and 500 kilograms respectively. South Korea and Taiwan have values close to 1,000 kg

per person. Despite China being the world’s largest steel consumer, with a population

exceeding 1.2 billion, the country ranks among the lowest in the world in terms of steel

consumption per capita. According to the China Economic Information Service (CEIS

0324 2003 art.043), in 2002 the per capita steel consumption in China was only 141 kg.

0

50,000

100,000

150,000

200,000

250,000

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

App

aren

t Cru

de S

teel

Con

sum

ptio

n(th

ousa

nd to

nnes

)

PR China USA Japan Russia Germany Korea

41

Chart 2.13: Six Leading Producer Countries' Apparent Crude Steel Consumption per capita,

1989-2001


2.6.3 Summary of Global Demand

Western economies’ steel demand per capita is not expected to significantly increase.

This may be related to the level of development in those regions’ relatively stable

population sizes and also the introduction of substitute materials (aluminium, plastics

and fibre glass). The relationship between demand for steel and level of economic

development is discussed in Chapter 3. With other developing regions and countries,

one should continue to see demand growth. In particular, China with such a low steel

consumption per capita value of around 140 kg suggests that the country still has great

potential for increased demand to occur before it starts to level then reduce. The

outlook for China’s demand for steel is examined in Chapter 3.

0

100

200

300

400

500

600

700

800

900

1000

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Maj

ors

Pro

duce

r cou

ntrie

s' A

ppar

ent S

teel

(Kilo

gram

s) PR China USA Japan Russia Germany Korea

42

2.7 Employment in the Steel Industry

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


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


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


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

Year 1958 1959 1960 1961 1962 Steel

Production ( tonnes)

8,000,000 13,865,000 18,671,000 8,703,000 6,672,000

Data source: China Steel Statistics 2000, p.1 (The State Administration of Metallurgical

Industry)

By the end of 1960, steel had increased to 18,671,000 tonnes. The 1950s was a period

when Russian engineers and technology developed China’s base industry of around 10

key steel plants (Metal Bulletin 1978, p.21). Ideological differences between Russia

and China had started to emerge and Russian engineers left the country in 1960. It was

becoming clear that the Great Leap Forward campaign was unsuccessful, technical

efficiency of steel production was low - the output was of low quality and the priority

given to steel production, had damaged the economy. From 1959 to 1961 inclusive was

known as “the three difficult years”. The people’s commune focus on iron production

had taken priority over agriculture and this combined with natural disasters, poor

agricultural planning, the departure of soviet support and economic dislocation caused

by the Great Leap Forward campaign gave rise to a serious famine which caused around

30 million people to die from starvation and related disease. Although higher figures

have been reported, this is the accepted estimate of the death toll (Chang 1991, p.309).

Mass production of steel had now ceased and output plummeted not recovering until

1969. Aware of the failure of the Great Leap Forward campaign, the Chinese

Government instigated a period of Recovery and Readjustment (1961-1965). During

this period, the guidelines that were formulated were economic recovery, adjustment,

consolidation, reinforcement or enrichment of weak links (Dorian 1994, p.62). It was

55

during this period that the 5.4 million tonnes per year Maanshan steel plant was

constructed and according to Metal Bulletin (1978, p.15) this was probably the most

significant construction project in China’s iron and steel industry during the Recovery

and Readjustment period.

In 1964, as a result of security concerns, China developed a “Third Front” defence

strategy – this was to put in place a third line of defence in the Western parts of China.

During this period, major industries were relocated from the coast to the interior and

major expenditure and resources were allocated to military equipment facilities to

ensure that important industries were protected. After many of the important coastal

factories were relocated, they lost their production capability. This “Third Front”

strategy and its subsequent attempts to industrialise China’s interiors were ineffective

and wasteful. In fact, it was a good example of violating the principles of comparative

advantage.

At least, the Recovery and Readjustment period could be credited with laying the

foundation for structural improvements in the national economy. By 1969, steel

production had started to recover (production output of 13.3 million tonnes compared

with the 1968 output of 9 million tonnes).

This period included the Third Five-Year Plan (1966-1970) and the Fourth Five-Year

Plan (1971-1975). The government continued to correct its mistakes by making

adjustments to the economy. Mao Zedong did not accept responsibility for this disaster

and left Deng Xiaoping and Liu Shaoqi to resolve the food shortage and rectify the

economy. He seemed to be more concerned with his own political survival when he

56

unleashed his Cultural Revolution programme on the nation. In relation to steel

industry development, this can be classed as the start of reform - a time to reflect on

past errors and rebuild. In 1965, the first Basic Oxygen furnace10 was built at the

Shoudu steelworks in Beijing. With no aid coming from Russia, China looked to the

west for technological improvements and in 1966 two-off 55 tonne basic oxygen

furnaces were purchased from Austria and installed at the Taiyuan plant (Metal Bulletin

1978, p.16, p.49).

Mao Zedong’s Cultural Revolution was indeed the next milestone period. This was

unleashed on the nation in 1966 and lasted for 10 years. In effect, it took precedence

over the Third and Fourth Five-Year plans as officials struggled to survive during the

many denunciations that were to take place. During this period, Mao Zedong’s

ideology and power were to take hold again. “Bu Po, Bu Li” (destroy then rebuild). He

set about destroying the “Four Olds” - outdated culture, ideas, customs and habits. As

Mao Zedong’s Red Guards emerged and bullied the population, this was a time of class

enemies, denunciation, terror and atrocity. This period effectively came to an end on 9

September, 1976 when Mao Zedong died. During the first half of the Cultural

Revolution, steel production did not increase significantly (between 1965 and 1970

production increased from 15,320,000 to 17,786,000 tonnes and then subsequently

increasing up to 23,903,000 tonnes in 1975).

By 1971, relations with the west were improving and in 1972, Richard Nixon, President

of the USA, visited China and the “seed was sown” for trade relations with the western

world to improve. Now China could start to access Western technology and took

10 Of capacity 150,000 tonnes per year.

57

advantage of this to upgrade steel mills. In 1974, over US$350 million of steel plant

was purchased from West Germany and Japan for the Wuhan plant. Additional

purchases were subsequently made (Metal Bulletin 1978, p.20). These were mainly

from German plants. During the Fourth Five-Year Plan, the Four Modernisations

(agriculture, industry, science and technology) and open-door concepts were developed.

Period 3 (1976-1985): Foundations of Reform

The Fifth Five-Year Plan (1976-1980) was part of a ten year plan extending to 1985 - in

effect covering what was to be the Sixth Five-Year Plan (1981-1985). This plan had the

steel industry as a key driver of the country’s economic development. The state

planned to build ten iron and steel complexes (Peking Review, 10 March 1978, cited in

Dorian 1994, p.70), but problems with capital funding caused this plan to fail. Between

1978 and 1981, Deng Xiaoping made adjustments to the plan and the foundation of

social and economic reforms were being laid. In 1978, Zhao Ziyang and Deng

Xiaoping formally introduced the Four Modernisations policy and Deng Xiaoping made

his famous statement: “To Get Rich is Glorious” and in 1979 opened the door to a

partial market economy that was eager to trade with the world. Trade and market

reform became a priority for the government. The mechanics of free market conditions

would encourage improvements in the factors of production. So up until this time, the

steel industry was mainly owned and controlled by the government. The Sixth Five-

Year Plan (1981-1985) saw a dramatic change towards trade with the west. The open

door policy was put in place. Foreign investment and joint ventures were encouraged.

With reforms taking place, private ownership of steel plants was encouraged and a

transformation from public to private ownership of steel production plants commenced.

Deng Xiaoping’s adjustments to the Fifth Five-Year Plan had seen steel output

58

increasing from 20.5 million tonnes in 1976 to 37.1 million tonnes in 1980. By the end

of the Sixth Five-Year Plan (1985) steel output had grown to 46.8 million tonnes. The

reforms of this period were to shape China’s steel industry into being a world leader

over the next 15 to 20 years, getting the industry into good shape for the next market

reform period when China would make application to join GATT in 1986.

Period 4 (1986-2003): Continued Social and Economic Reforms, WTO

Membership and Rapid Economic Development

During the Seventh Five-Year Plan (1986-1990) reforms continued and improved

control over the economy took place. In 1988, a three-year austerity programme

commenced to cool the economy and enable it to sustain its development. As can be

seen from Chart 3.1, economic development started to grow rapidly from 1,020 billion

yuan in 1986 to 1,854 billion yuan in 1990. During the same period, steel production

increased from 52.2 to 66.35 million tonnes.

Chart 3.1: China’s GDP (in current prices), 1952-2002

Data sources: China Statistics yearbook, 2001 and Asian Development Bank

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

1952

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1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

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Bill

ion

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59

In relation to the steel industry, the Seventh Five-Year Plan promoted substantial

renovation of existing plant to boost production capacity, efficiency (reduce energy

consumption) and improve quality control (Dorian 1994, p.78). The plan aimed to raise

crude steel production to 58 million tonnes for 1990 and 80 million tonnes for 2000.

This objective for the steel industry was not only achieved but also exceeded with 66.35

million tonnes of steel being produced in 1990 and 127.24 million tonnes in 2000.

During the Eighth Five-Year Plan (1991-1995) reforms continued (social and

economic). At the time of approving this plan, a ten-year programme (1991-2001) was

adopted, the aim of which was to map out the development for the final decade of the

century. During this planning period, China was to continue its transition to a full

socialist market economy. In relation to the steel industry, it targeted:

• Restructuring the industry with an emphasis on quality and reduction of energy

consumption to be achieved through importation advanced technology and

equipment (Business China 1992, p.45-46)

• Produce 59.5 million tonnes of rolled steel by 1995 (Dorian 1994, p.82)

• Raising crude steel production to 80 million tonnes by 2000 (this follows the

Seventh Five-Year Plan) and increase the flat rolled and tubular steel product

ratio from 37% to 45%. The flat rolled and tubular steel product ratio is a

measure of a country’s steel making structure - it is the ratio of flat rolled and

tubular steel product produced to total steel produced. Higher ratios indicate

higher level of technical equipment Increased investment in mining. Eight

major raw material mines would be developed (Business China 1992, p.46).

The Central Government stated that they would reduce the distribution of iron

ore to companies that own iron ore mines and do not develop them. Companies

60

having no mine ownership were ordered to seek venture partners. Focus is for

producers to develop raw material bases and strengthen the procurement of iron

ore in their own area (cited in Sugimoto 1993, p.284).

By 1995, China had produced a total of 81 million tonnes of rolled products and by

2000 had achieved 43% flat rolled and tubular steel product ratio, just falling short of its

45% target. This is an important achievement and improvement needs to continue.

This is important in view of the focus on construction and infrastructure development

(where sections and rail have been required in greater proportions than flats and tubes

which are used more in manufacture). As China reaches a level of development when

its infrastructure construction moderates then the industry will need to increase steel

products required for the manufacturing sector. The industry is lacking in such product

making capability. This important finding is discussed in more detail in Chapter 6.

Mine investment and partnering (domestically and internationally) significantly

increased during the plan period and have subsequently continued to do so. Recently, it

has become quite evident that more of this development is needed if China is to sustain

growth in steel production and demand for mined raw materials.

The Ninth Five-Year Plan (1996-2000) was part of the 10 year programme that also

included the Eighth Five-Year Plan. It incorporated 105 targets and continued reform

and liberalisation with a doubling of the GDP between 2000 and 2010. According to

the plan, inefficient state-owned enterprises (SOE) would be reformed and China’s

pillar industries would be enhanced (Young 1996). This occurred and continued after

the planning period.

The Tenth Five-Year Plan (2001-2005) lays out development priorities and makes

61

specific mention of 4 major projects that will consume large quantities of steel. These

are:

1. Construction of a Qinghai -Tibet railway that will consist of over 1,140 km of

rail line

2. A west-to-east power transmission project consisting of 6,680 km of power

transmission lines

3. A west-to-east natural gas transmission pipeline from Tarim in Xinjiang to

Shanghai - a total length of 4,200 km of heavy-duty pipeline

4. A south-to-north water diversion project to link the Yangtze and the Yellow

Rivers by two channels in east and middle China (China Metals 2003, p.17).

The plan gives an idea of the need for construction and manufacturing steels and as a

result is useful for estimating iron and steel demand. In relation to roads and railway:

• The total length of China's highways open to traffic will be 1.6 million km

• Upgrading of existing railway lines to bring the total length of China's railways

to 75,000 km (China Business Daily Update 2001).

Investment in railroad will amount to US$12.3 billion which includes 6,000 km of new

main line, 1,000 km of new local line construction, 3,000 km of track doubling of

existing lines, plus other project work like electrification. US$10 billion will be spent

on upgrading locomotives. China invests more in railroads than any other country in

the world, followed by Germany. Investment in associated railroad infrastructure is

reported to equal US$33 billion (Knutton 2002).

62

In relation to the machine tool industry:

• The industry is to maintain an average growth of around 10 %

• Current supply shortfall in relation to demand to be changed

• The industry is to provide most of the nation’s industrial needs

• Break restrictions on industries, regions and encourage mergers

• Establish a market environment that is beneficial to fair competition

• Draft unified technical standards, laws and regulations (Asia Pulse 2001).

The Tenth Five-Year Plan indicates continued demand for steel. According to the

president of China Iron and Steel Association Wu Xichun (2000, p.408), China needs to

improve transportation, loading and distribution of iron ore within the country. In the

Tenth Five-Year Plan, there are proposals to shift more steel production to the coast so

that iron ore imports are handled more efficiently. The country's four largest steel

makers - Shanghai-based Baoshan Iron and Steel, Wuhan Iron and Steel in Hubei

Province, Beijing-based Capital Iron and Steel and Anshan Iron and Steel in Liaoning

Province - have set their export targets during this planning period. Baoshan plans to

export 3 million tonnes a year by 2005 and the other three producers aim to each export

1.5 million tonnes a year by 2005.

Baotou Iron and Steel Group has outlined its goals for the Tenth and Eleventh Five-

Year Plans. With an expected outcome of 6 million tonnes by 2005, the company is

aiming to become one of the top 50 steel producers in China. The planned performance

targets are shown in Table 3.3.

63

Table 3.3: Baotou’s Planned Performance under the Tenth and Eleventh Five-Year Plans

Year 2003 2004 2005 2010

Output (million tonnes)

5.3 5.5 6 -

Sales revenue (billion yuan)

13 15 17 26

Data source: CEIS 0421 2003 art.031

The Tenth Five-Year Plan covers 13 industries including machinery, motor vehicles,

and metallurgy. It aims to restructure and upgrade the industrial sector, social and

economic development, increase equipment manufacture and develop the supply of the

nation’s raw materials (Xinhua 2001). It is unlike previous plans in that it focuses less

on targets and more on growth, the environment and sustainable development.

According to the Asian Development Bank, the plan “reflects the greater role of

markets in the economy” (cited in Young 2001). As the State invests in infrastructure

construction, domestic demand for steel products will continue to increase - especially

in the large, undeveloped western regions. An Iron and Steel Industry Association

(ISIA) report (CEIS 0714 2003, art.034) expects that China’s steel production will grow

to over 200 million tonnes in 2003. In addition to being a major producer, China is also

a major user of steel with consumption being at about 24% of the world’s total steel

output. The ISIA report also expects steel consumption to increase by over 12% during

2003.

Period 4 (1986-2003) was a very significant period where China made an application to

join GATT in 1986 and together with further market and trade reforms led to China

being accepted into the WTO on 11 December 2001, and then subsequently achieving

normalised trade relations with the USA on 1 January 2002. This was a period of rapid

64

growth in steel production along with economic development. China was to overtake

Japan in 1996 to become the world’s leading steel producer. Table 3.4 shows China’s

production through the four periods from 1949 to 2002. Production peaked at the time

of the Great Leap Forward campaign in 1960, followed by a large decrease in output,

which did not recover until 1969. China become the world’s largest steel producing

country in 1996 and has maintained this leadership position since that year.

Table 3.4: China’s Crude Steel Production Compared to World Production 1949-2002

Year

China

Production

(million tonnes)

World

Production

(million tonnes)

China’s

Ranking

China’s Share of

World Production

(%)

1949 0.158 160 - 0.10

1955 2.853 270 - 1.06

1960 18.671 346.4 - 5.39

1965 12.230 454 8 2.69

1978 31.780 717.2 5 4.43

1980 37.121 716 5 5.18

1985 46.794 718.8 4 6.51

1990 66.349 770.5 4 8.61

1994 92.613 725.1 3 12.77

1995 95.360 752.3 2 12.68

1996 101.237 750.0 1 13.50

1997 108.911 798.9 1 13.63

1998 114.458 777.2 1 14.73

1999 123.954 788.3 1 15.72

2000 127.236 847.6 1 15.01

2001 152.260 849.6 1 17.92

2002 181.552 897.0 1 20.24

Data sources: China Steel Statistics 2000, p.32 up to 1999 for rankings, from 2000 onwards,

International Iron & Steel Institute Publications

65

3.2 Profile of China’s top 10 steel producers

Table 3.5 presents a profile of China’s top ten steel producers (ranked on 2002 output).

This shows the location, product range and steel output for 1999, 2000, 2001 and 2002.

It is followed by Figure 3.1, which shows the location of each of the top 10 producers.

With the exception of the Baosteel Corporation, China’s top ten steel producing

companies are not considered large. In 2002, the top ten producers’ total of 76.8

million tonnes, represents 42.3 % of China’s total steel output (181.552 million tonnes).

The next 40 or so steel companies produce the remainder. In relation to the top 50 steel

companies, only 9 produce over 4 million tonnes, the majority of them being small with

output below 2 million tonnes per annum. According to the State Development and

Reform Commission (SDRC), more than 200 of the 280 steel companies in China were

small, each with an annual output of less than 100,000 tonnes (CEIS 0813 2003,

art.032). Many are high in pollution and low in energy efficiency. This shows that

industry concentration is low and gives an indication of the potential for continued

reform to improve technical efficiency and performance and suggests further scope for

mergers and closures of smaller plants as the larger producers take advantage of

economies of scale. The SDRC also reports that a large additional amount of steel-

making capacity is to come into production between 2003 and 2006. This continuing

increase in productive capacity is discussed in detail in relation to productive capacity

as an important finding.

66

Table 3.5: Profile of China’s Top 10 Steel Producers

Steel Output (Million tonnes) Producer Location Products 1999 2000 2001 2002

Baosteel Shanghai

Steelmaking & foundry pig iron, ingots, wire rod, reinforcing bars, round bars, square bars, flats, sections, hot & cold rolled uncoated hoop & strip, medium & heavy plates, hot & cold rolled sheet/coil, hot dipped galvanised sheet/coil, electro galvanised sheet/coil, colour coated sheet/coil, tinplate, wire, seamless tubes & pipes, longitudinal welded tubes & pipes, galvanised tubes & pipes

16.77 17.74 18.68 19.5

Anshan Liaoning Blooms, billets, wire rod, reinforcing bars, round bars, square sections, heavy & light rails, heavy & medium plates, tubes&pipes

8.51 8.81 8.79 10.1

Shoudu Beijing Slabs, blooms, billets, wire rod, reinforcing bars, round bars, flats, light channels, rails, hoop, strip, plate and wire

7.34 8.03 8.25 8.2

Wuhan Hubei

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

6.22 6.65 7.09 7.6

Benxi Liaoning Steelmaking pig iron, foundry pig iron, wire rod, medium plates, cold rolled uncoated sheet/coil, hot dip galvanised sheet/coil, spiral-weld tubes & pipes

3.88 4.22 4.91 6.2

Maanshan Anhui

Steelmaking pig iron, billets, wire rod, reinforcing bars, round bars, light sections, light channels, I-beams, H-beams, medium angles, joists, wide & narrow flange beams, sheet piling, hot rolled uncoated hoop & strip, medium plates, boiler plates, pressure vessel plates, ship plates, wire &train wheels

3.55 3.99 4.78 5.4

Tangshan Hebei Steelmaking pig iron, hot & cold rolled uncoated hoop & strip, hot dipped galvanised hoop & strip, colour coated sheet/coil

3.15 3.20 3.92 5.1

Panzhi-hua Sichuan

Steelmaking pig iron, ingots, slabs, billets, wire rod, round bars, heavy & medium joists heavy angles, heavy channels, rails hot & cold rolled uncoated hoop & strip, hot & cold rolled uncoated sheet/coil, hot dipped galvanised sheet/coil, seamless tubes & pipes, cold drawn tubes & pipes

3.32 3.60 3.57 5.0

Hualin Hunan Billets, wire rod, plate, hot rolled uncoated sheet/coil 3.02 2.84 4.06 4.9

Baotou Neimenggu -Inner Mongolia

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

billion yuan. Eleven other steel companies, Shangang, Xinxing Pipe, Tangshan, Hualin,

Shougang, Benxi, Shaoguan, Handan, Panzhihua, Jinan, Jinxi, had profit over 500

million yuan.

With the exception of Panzhihua, the concentration of the top ten producers is in the

eastern and northern provinces of China (see Figure 3.1).

68

Figure 3.1 Location of each of China’s top 10 steel producers.

As the regional consumption of steel increases, large gaps in supply capacity are

emerging. This encourages further developments in the steel industry. For example

based on 2002/2003, Guangdong Province consumed approximately 25 million tonnes

of steel, but its annual production capacity is only six million tonnes. As a result,

Guangdong Steel is examining the feasibility of developing one of the largest steel

plants in China. This project is known as the Linhai steel project (CEIS 0825 2003,

art.030).

3.3 Crude Steel Production by Steel Making Process

The blast furnace steel making process is the most commonly used process to produce

“raw” or pig iron and is considered the lowest operating cost method but involves high

Baosteel

Anshan

Shoudu

Wuhan

Benxi

Tangshan

Maanshan

Hualin

Baotou

Panzhihua

Baosteel

Anshan

Shoudu

Wuhan

Benxi

Tangshan

Maanshan

Hualin

Baotou

Panzhihua

69

initial capital investment. Nevertheless, it is still the most efficient process for

producing large quantities of pig iron for feed into subsequent steel making process

plant. The most common steel making methods are the electric arc furnace and the

basic oxygen (BOF) process. The traditional open-hearth furnace is another method,

but this is an old and primitive way to produce steel and has been virtually eliminated.

However, it was very common in China in the 1990’s (see Chart 3.2). The electric arc

and BOF processes are more feasible for low production values and are becoming

increasingly used worldwide. Chart 3.2 compares China’s steel production for the 3

steel making processes since 1986. As would be expected, growth in the use of the

basic oxygen and electric arc processes has occurred which is in line with the White

Paper on China’s Iron & Steel Supply and Demand (SETC 2001), the traditional open

hearth furnace has been phased out.

Chart 3.2: Profile of China’s Steel Making Processes, 1986-2002

Data sources: China Steel Statistics, 2000 and 2001, Beijing and International Iron and Steel Institute

(various)

0102030405060708090

100110120130

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

Ste

el P

rodu

ced

(Mill

ion

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es)

Open-hearth Furnace Basic Oxygen Furnace

Electric Arc Furnace

70

3.4 Continuously Cast Steel Development

China’s improved process efficiency can be seen through its increased utilisation of

continuously cast steel processes. These have increased from 5% to 92.5% of total steel

production between 1980 and 2002 (see Chart 3.3).

Chart 3.3: China’s Continuously Cast Steel Development 1972-2002

Data sources: IISI (publications & www.worldsteel.org/wsif/wsif2002, August 2002) & State

Administration of Metallurgical Industry, Beijing, 2000

According to the State Continuous Casting Centre (cited in CEIS 0507 & 0814 2003,

arts.031 and 022 respectively) during 2002, 54 new continuous casters were

commissioned, increasing continuous casting capacity by 27.5 million tonnes and in

2003, 85 more continuous casters are scheduled to be commissioned bringing

continuous casting capacity to 238.38 million tonnes. Actual continuous cast billet

output is expected to exceed 200 million tonnes with the continuous casting ratio

0

20

40

60

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1972

1973

197419

75197

619

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78197

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8219

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01200

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e St

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Continuously Cast Steel Produced in China

Total Crude Steel Produced in China

92.5%

5%

71

exceeding 95 percent. This output consists of 170 tonnes from the 75 key steel

enterprises included in national statistics’ reporting together with the output of 30

million tonnes by nearly a 100 steel enterprises not covered by national statistics’

reporting (CEIS 0507 & CEIS 0814 2003).

3.5 Steel Production and Economic Growth

By the end of 2002, China had 1,588 large industrial enterprises with a total asset value

of 5,349.746 billion yuan and generated a total of 3,622.711 billion yuan in sales

revenue (CEIS 0826 2003, art.24). Table 3.6 shows the percentage sales revenue and

asset values for the major industrial sectors in 2002.

Table 3.6: Major Industry Sector Percentage Sales Revenue and Asset Values - 2002.

Industry Sector % Sales Revenue % Asset Value Petrochemical 24.9% 13.7 %

The iron and steel enterprises 16.4 % 20 %

Electronic 14.9 - Power and transport

equipment 11.5 12.6 %

Data source: National Bureau of Statistics of China cited in CEIS 0826 2003, art.24

The steel industry is a major industrial sector in revenue and asset value. The Chinese

steel industry has come a long way since 1949 (see Chart 3.4). Up to the late 1970s and

early 1980s, steel production occasionally fell below the preceding year. As a result of

political reform, production of steel started to rapidly grow in the early 80s and still

continues with each year’s production being higher than the preceding year. In 1996,

steel production in China exceeded that of Japan for the first time, making China the

72

world’s largest steel producer. Between 1981 and 2002, its production rose from

35.604 to 181.552 million tonnes (increase of 410%).

Chart 3.4: China's Crude Steel Production, 1949-2002

Data sources: China Steel Statistics 2000, 2001 (State Administration of Metallurgical Industry,

Beijing) and the International Iron and Steel Institute

In 1949 steel production was a mere 158,000 tonnes increasing to 1.35 million tonnes

during the Period of Rehabilitation (1949-1952). From 1953 to 1957 was the First Five-

Year Plan that saw China adopting the soviet model to achieve industrialisation. Steel

output grow from 1.7 to 5.35 million tonnes and continued growing through until 1960

(18.67 million tonnes) when the effects of the Great Leap Forward campaign started to

take effect and output dropped to 6.67 million tonnes in 1962. After which time, the

Recovery and Readjustment initiative (1961-1965) started to improve steel output. This

was followed by the Third and Fourth Five-Year Plans (1966-1970 and 1971-1975

0

20

40

60

80

100

120

140

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180

200

1949

1951

1953

1955

1957

1959

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73

respectively) by which time steel production output had grown to 23.9 million tonnes.

The economic reforms that occurred during the Fifth and Sixth Five-Year planning

periods (1976-1980 and 1981-1985 respectively), accelerated steel output and this

continued to 182 million tonnes by the end of 2002.

Chart 3.5, shows the rate of growth each year from 1949 to 2002 and projects that an

average 6 million tonnes annual growth could be expected over the next decade or so

(notwithstanding the 20% annual growth between 2000 and 2002). This is supported

when one considers the state of China’s manufacturing and construction industry, which

has been growing rapidly and was specifically outlined in the Tenth Five-Year Plan.

Growth should continue in view of the planned investment in the nation’s infrastructure

(“4 big projects”). The potential here is articulated further in Chapter 5.5 discussing

China’s entry to the World Trade Organisation. One can get an idea of the country’s

demand potential when considering that by the end of 2001, developed countries like

Japan, USA and Germany had per capita consumption values of 600, 400 and 500

kilograms respectively. South Korea and Taiwan had values closer to 1,000 kg per

person. By 2002, China's steel sector cut staff numbers by 20 per cent, bringing the

number of employees directly engaged in steel-making down from over 1 million to

around 800,000. The industry's objective is to raise steel output per employee to 150

tonnes a year from around 140 kg (compared with a world average of 183 tonnes). The

top 69 steel makers produce 123 tonnes per employee, compared with less than 40

tonnes before 1996 (China Economic Review 2000). The factors behind steel demand

growth and demand are looked at in detail in Chapter 3.8.2 under Intensity of Demand.

74

Chart 3.5: China's Steel Production Growth Rate, 1949-2002

Data sources: China Steel Statistics 2000, 2001 (State Administration of Metallurgical Industry, Beijing)

and International Iron and Steel Institute

We have already examined the key stages in China’s history and how soviet planning

models were used to industrialise the country. The iron and steel industry was shown to

be an important aspect of most of the Five-Year Plans in the country’s economic

development. This research attempts to assess the extent to which the iron and steel

industry in China has contributed to the country’s economic development and growth.

So changes that have taken place in key economic indicators are examined while at the

same time considering connections and relationships to the iron and steel sector. This

also illustrates whether the industry will (and can) sustain its growth. To do this, the

following key economic indicators are examined in detail in the sections and chapters

that follow.

• Gross Domestic Product

• Agriculture and Industrial Production

-60

-40

-20

0

20

40

60

80

1952

1954

1956

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

Rat

e of

Cha

nge

%

75

• Money Supply

• Energy consumption

• International trade

• Foreign Investment

• Exchange rate

• Debt levels

3.5.1 Gross Domestic Product

During the period from 1992 to 2002, China’s GDP increased from 2,664 to 10,240

billion yuan an increase of 7,576 billion yuan (2.84 times the 1992 value). The

remarkable change in China’s economic development is clearly seen in Charts 3.6 and

3.7. Chart 3.6 shows China’s GDP growth, in current prices, for 1952-2002.

Chart 3.6: China's GDP (Current prices, in yuan due to exchange rate variations) 1952-

2002

Data sources: China Statistics yearbook 2001 and Asian Development Bank

Note: The above Chart is Chart 3.1, reproduced for convenience.

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

1952

1954

1956

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

Bill

ion

Yuan

76

Up to the early 1970s, no significant development occurred (see Chart 3.6). This

changed from the mid 1980s. Rapid growth started in the early 1980s, stalling only

moderately during the Asian economic crisis of the mid 1990s. This strong

performance still exists if the values are inflation adjusted, as shown on Chart 3.7 where

the GDP change from 1985 to 2002 is adjusted to 1985 pricing.

Chart 3.7: China's GDP (at 1985 pricing), 1985-2002

Data source: Asian Development Bank

Taking inflation and the changing time value of money into consideration, Chart 3.7

shows the periods where growth was actually negative. These were 1985-1986, 1988 to

1990 and 1993-1994. Positive growth occurred during the remaining periods.

According to China’s State Statistics Bureau deputy director-general, Qiu Xiaohua

(Tschang 2001), the country should maintain 7 per cent economic growth or better

during the next 10 to 15 years. With the ongoing social and economic reforms

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77

following Deng Xiaoping’s open door philosophy of the 1970s continuing along with

the country’s industrialisation and infrastructure development, national industrial and

agricultural production output are expected to increase. However, as demonstrated in

the next section, agricultural production is not growing and does not show signs of

growth potential. The large resource of low cost labour is giving Chinese companies a

competitive advantage, leading to global trade increases and improvements in people’s

income along with standard of living. This creates more consumption demand for

goods, houses and services. The increased output utilises Chinese resources and growth

is maintained. China’s Premier, Zhu Rongji (quoted in China Business Daily Update

2001) confirmed this trend when he forecast 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.

During the 2002 National China’s Communist Party Congress, the goal of doubling

GDP by 2020, making China the third largest economic power in the world was set

(CEIS 0425 2003, art.036).

A major threat to continued growth in national output is the trend particularly with the

younger generation to develop a large appetite for western goods. If this trend

continues, it will see imports of such goods increasing at the expense of local labour and

economic growth will slow down. Later discussion on China’s domestic and

international debt obligations, indicate that China’s banks’ domestic non-performing

loans - bad debts - may be a significant factor that leads to a slowing down of China’s

GDP growth and economic performance. According to Hu (cited in Taipei Times 2002,

online), “continued delays in disposing of bad debts could cost China enough to retard

its growth rate by as much as 2 percentage points in the coming years”. These concerns

78

will be discussed further along with currency appreciation, which has the potential to

lower export competitiveness in Chapter 5.

3.5.2 Agriculture & Industrial Production

For many centuries, China’s main concern as a nation was feeding its population. So

agriculture became the foundation of its economy. Chart 3.8, illustrates that from the

early 1980s, China’s industrial production ability started to emerge with initial

development being slow as a result of structural changes that were taking place. In

1981, agricultural production was US$88.36 billion and industrial production was

US$117 billion. By the early 1990s, it was becoming evident that China’s economy

was developing strongly. In terms of value, industrial production continued increasing,

a little slower during the Asian economic slowdown, but still faster than agricultural

production. Agricultural production increased modestly to US$112 billion in 1994 then

had a 53% increase to US$171.6 billion in 1996 and has not changed much since

(US$179.8 billion in 2002). With improved economic development, increasing

population and international trade, the value of agricultural production should have

been much higher. In comparison, between 1999 and 2000, industrial production grew

from US$422.429 to US$478.049 billion (13.2%). Between 2000 and 2001, it grew

from US$478.049 to US$514.776 billion (7.68%) and between 2001 and 2002 it grew

from US$514.776 to US$554.951 billion (7.8%). According to the CRU Monitor Steel

(CRU 2002b, Chasing the dragon, p.3), the highest growth in 2001 and 2002 industrial

production came from the steel industry where production increased by 25%.11

11 International Iron and Steel Institute data shows that steel production (tonnes) increased by 20% between 2001 and 2002.

79

Chart 3.8: Agricultural & Industrial Production values, 1981-2002

Note: Industrial production values include mining, manufacturing and utilities


Chart 3.9: Rate of Change of Chinese Agricultural and Industrial Production, 1982-2002

Note: Industrial production values include mining, manufacturing and utilities


-5.00%

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80

Chart 3.9, shows the annual rate of change for both agricultural and industrial

production. Since mid 1990s, agriculture production has trended lower. As a result of

the Asian economic crisis, the rate of change of industrial production reduced in the

1990s, with increases commencing in 1998 as the Asian economic crisis ended. The

poor performance of the agricultural sector compared to the industrial sector is further

demonstrated in Chart 3.10 which shows a breakdown of China’s GDP by the three

major sectors: industry, agriculture and public administration. The value of total

industrial value includes industrial production, construction, trade and transport. Since

1981, the value of agricultural production has increased by US$91 billion (103%), the

value of finance, public administration by US$217 billion (639%) and the value of the

country’s industrial activity has increased by US$650 billion (418%). Chart 3.11 shows

the same three major sectors in percentage terms.

Chart 3.10: Breakdown of China's GDP into the 3 Major Sectors, 1981-2002

Data Source: Asian Development Bank

$0

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Value of Total Industrial Activity

Value of Agriculture

81

Chart 3.11: Percentage Breakdown of China's GDP into the 3 Major Sectors, 1981-2002


Industrial activity value and contribution to GDP are measured and reported in national

accounts. The iron and steel industry is a major part of these industry sectors and in

2002, their combined output value was US$806.3 billion. This represented 65.12% of

2002 GDP. In 1992 and 1982 industrial activity, as percentage of GDP, was 60.50 and

53.24% respectively, indicating significant increases in this industry sector. Comparing

to China’s traditional sector, agriculture, where the contribution for 2002, 1992 and

1982 was 14.53, 21.77 and 33.28% respectively, we see significant decreases. Chart

3.11 further demonstrates evidence of this lagging agricultural sector. It is important

that the downward trend since 1981 is halted. At a time of a booming industrial sector,

this lagging development in the agriculture sector should be a warning sign to the

central authorities. If not adequately addressed, it will give rise to major disparities in

incomes and living standards between rural and urban households which will further

adversely impact this important sector of the Chinese economy. This finding is

discussed further in Chapters 5 and 6.

0.00%

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% G

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Industrial activity as % of GDP

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2002

82

Another important indicator in the domestic economy that has an impact on consumer

demand is money supply. This is examined in section 3.5.3. Other important economic

factors (exchange rate, debt levels, foreign investment, international trade and energy

consumption) are examined in later sections and chapters.

3.5.3 Money Supply

The amount of money available to consumers (and how it is used) has an important

impact on the national economy and the type of goods consumed which in turn impact

the demand for resources. As long as money supply increases in a stable manner,

people generally enjoy improved standards of living. This is evident in increased

purchases of houses, automobiles, washing machines and other goods. In relation to

this research topic, this means money supply relates to steel consumption demand. The

impact on national output will depend on the extent this increased money supply is used

for day-to-day purchases; investment or consuming luxury-imported goods. In the

medium to longer term, it will have a significant effect on economic development.

The supply of money comes in many forms: workers’ wages, sale of goods and loans

from banks. Money can also be stored in various types of bank accounts or as cash in

people’s possession (personally or in safes at offices and homes). Money supply values

are important measurements in National Account statistics and are generally classified

as M0, M1 and M2. M0 refers to cash in circulation; M1 refers to narrow money

supply and includes M0 and demand deposits (current accounts). M2 refers to broad

money supply and includes business deposits, quasi-money (fixed and savings deposits),

personal savings, and cash in circulation. The accumulation of foreign exchange

83

reserves and bank lending, are the main factors that encourage money supply growth.

Chart 3.12, shows broad and narrow money supply since 1981.

Chart 3.12: China's Money Supply, 1981-2002

Data source: Asian Development Bank (various year reports)

In relation to material demand, positive rates of growth of money supply increase

consumption and put upward pressure on material demand. When growth rates exceed

15%, this can introduce inflationary pressures, which adversely impact the national

economy. Lower rates of money supply reduce consumption and can lead to

deflationary pressures. It is important for economic policy to get the balance correct.

Chart 3.13 shows the rates of money supply growth, 1982-2002. In 2002, rates of

growth of 20% were experienced. These large growth rates are continuing in 2003,

according to Kyne (2003, p.A3), M2 money supply growth increased 22% in August

2003 to US$2,540 billion. This was the eighth consecutive month in 2003 that M2

money supply has risen above the central bank’s target of 18% growth value.

0

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84

Chart 3.13: Rate of Growth of China's Money Supply, 1981-2002

Data source: Asian Development Bank These high levels of money supply are supporting the construction and consumer booms

in China, but will cause upward pressure on domestic prices and encourage inflation. It

is not possible for an economy to sustain such a growth. Either limits on lending funds

or increasing interest rates will be necessary. Both of these measures will reduce

money supply growth and in turn put downward pressure on construction and

consumption activity. Kyne reports (cites Jun Ma, senior economist at Deutsche Bank)

that money supply increasing 21 – 22% monthly could generate 4 to 5% inflation in 12

to 18 months. This would put further pressure on an already heated economy and also

increase the risk of social instability due to aggravating the current disparities in rural

and household incomes. These are important findings.

From September 2003, the Central Bank raised the reserve requirements from 6 to 7%

for financial institutions to reduce the rapid lending of funds. The opposite approach

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85

was taken during the Asian Economic Crisis when reserve ratio requirements were

lowered from 13% to 5% to stimulate consumption (McGregor 2003, p1). Increasing

the reserve ratio is expected to remove about US$18 billion of cash out of circulation

(Wong 2003). This should ease inflationary pressures and inhibit domestic

consumption. Reducing domestic consumption will decrease the demand for steel

products which would help correct the supply demand imbalance that is estimated to be

costing China US$5 billion more for its iron ore raw materials alone (see Chapter 6). It

will also enable the country to focus on essential infrastructure construction which will

take pressure off steel companies to expand production capacity which if not managed

properly will lead to excess capacity after the current construction demand boom ends.

3.6 Productivity and Economic Efficiency

In the earlier years of the development of China’s steel industry, efficiency was very

low. However steel produced using the continuous casting process has increased - this

process has been shown to be the most efficient steel making process. China’s ratio of

continuous casting to total crude steel production has increased from 5% in the mid

1970s to just 92.5% in 2002; compared to the former world’s leading steel producing

country, Japan, where the improvement in continuous casting ratio was from 30% in the

70s to 97% in 2002 (refer to tables of steel production in Appendices 9.1.1 and 9.1.2).

Japan is still leading and this indicates that only modest improvements can be expected

in China’s continuous casting tonnages in the years ahead. However, if we examine the

breakdown of China’s steel production over time, we get a better understanding of how

this relates to economic growth (see Appendix 9.1.1, where the table shows the

breakdown in the types of steel products being produced).

86

As flat rolled and tubular steel sections require a different and higher level of

technology than other steel products, a good measure of technology improvement is to

look at the ratio of flat rolled and tubular steel produced to total steel production. The

steel making plant for production of long products is significantly less capital intensive

than that required for flat products. Traditionally, this ratio was used as an indicator of a

country’s steel industry structure (Sugimoto 1993). China’s ratio of flat rolled and

tubular steel produced to total steel production increased from a low 20% in 1974 to

40% in 2000 (see Appendix 9.1.1). Such low values (particularly in the earlier years)

were due to limitations with the country’s steel making plant. Improvements occur as

plant equipment and technology improve. Compared for example to Japan, which has a

constant value of around 49%, in terms of technical efficiency China has significant

potential for improvement. Chart 3.14 shows that China has consistently produced just

over double the long products (rail and sections – columns, channels) to flat products

(plates and strip). This resulted from the domestic focus being on infrastructure

construction (railroad, structures and buildings). As China’s steel industry increases its

capacity, it is essential this gap between the two processes is closed. This will better

position the industry to satisfy the value adding manufacturing industry rather than the

less value adding domestic construction industry. Otherwise the need to increase

imports of such flat products will continue. China is still a net importer of steel

products as is shown in Table 3.7. This issue is discussed further in Chapter 6.

87

Chart 3.14: Comparison of China’s Rolled and Flat Product Production, 1972-2002

Data sources: IISI and China Steel Statistics

Table 3.7: China’s Import and Export of Semi and Finished Steel Products (million

tonnes)

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Impor

t

8.089 36.87 25.81 14.81 16.54 13.62 13.11 17.0 20.71 25.64 29.22

Export 4.04 1.41 2.56 10.75 7.13 8.91 5.86 5.98 11.16 7.49 6.84

Data sources: International Iron and Steel Institute, Steel Statistical Yearbook 2002, p79, p.82

and China Metals, January 2003, p.19

Table 3.7 suggests that China has significant export potential when investment in flat

products increases. This will occur as China’s shipbuilding and motor vehicle

industries continue their development. After China reaches the stage of economic

development when steel demand for long products required for infrastructure

construction starts to slow down or stop, demand for flat products will be the driver that

will be needed to maintain China’s steel industry and enable it to continue being a key

driver of economic development. This does have to be carefully managed – particularly

0

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88

while other poorer economies are developing their iron and steel industries. The issue

is also considered later in relation to intensity of demand and stages of a country’s

economic development, when it will be even more important with China being a

member of the WTO.

China’s steel production has increased, but its productivity is still considered low in

relation to other developed steel producing countries. Chart 3.15, compares the five

leading countries’ steel output per employee. China’s average of 100 tonnes per

employee12 does not reflect the nature of employment in China where many people are

generally employed and most would receive very little salary. Nevertheless, with the

upgrading of steel plants with more efficient equipment that are much less labour

intensive, the need for large labour resources diminishes. So reduction of these

numbers is a priority for both the government and the steel industry sector. Faced with

the situation of increasing unemployment, this process is a little slower than one would

expect from developed countries.

Chart 3.15: Comparison of the World's Top Five Steel Countries Productivity (total

tonne/employees within that country's industry), 1990-2002

12 This value is an industry sector average. China’s leading steel producer, Baosteel’s productivity is closer to 600 tonne per employee.

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89

Data sources: IISI, China Steel Statistics 2000, 2001 (State Administration of Metallurgical Industry,

Beijing), 2000, p32 & 2001

3.6.1 Iron Ore Production – Principal Input Factor After going through the transition of becoming a world leader in the production of steel,

China’s demand for quality iron ore expected to continue to increase. According to the

Classification Standards of Solid Mineral Resource Reserves (Metal Bulletin 2002),

China’s iron ore reserves at the end of 1998 were 12.5 billion tonnes ranking fourth in

the world and the probable reserves were 22.3 billion tonnes. The CEIS (CEIS 0904

2003, art.033) reported in 2003 that the country has approximately 46 billion tonnes of

proven iron ore deposits and recoverable reserves of around 25 billion tonnes.

Unfortunately, these reserves have high levels of contamination and low iron content

(less than 35%). This means that China will continue to have an acute shortage of

quality iron ore and its economic development will become more and more exposed to

dependence on the international trade of iron ore. As China’s global trade position

diversifies and increases, its economic wealth will become inextricably linked to its

ability to obtain a low cost, secure supply of iron ore through international trade. Not

only does China need to understand the “new global economy” but also those wishing

do trade with China need to understand how China fits within a more liberalised world

economy. Zhou (cited in James 2002, p.55) articulates that the biggest barrier to

understanding China is realising that the country’s transformation is not about

conventional trade; it is about China’s active engagement in globalisation.

China’s iron ore production output increased from 75 million tonnes in the early 1980s,

before starting to increase in 1985 to 80 million tonnes. Output continued to increase to

90

a maximum of 268.6 million tonnes in 1997 after which time it reduced as it became

clear that due to the low iron content of China’s ore, it was more cost effective to import

it. Chart 3.16 shows China’s iron ore output from 1948 through to 2002 and Table 3.8,

shows China’s relative position in the world for iron ore production.

Chart 3.16: China's Iron Ore Production, 1948-2002

Data sources: American Iron Ore Association, International Iron and Steel Institute (various

publications, & www.worldsteel.org/wsif/wsif2002, August 2002), 2001 on - China Customs

Table 3.8, China’s Relative Position in the World for Iron Ore Production, 1990-2002

1990 1997 2000 2001 2002

Total World Production

(million tonnes) 983 1,063 1,051 1,052 1,097

China production

(million tonnes) 168.29 268.62 223.95 217.05 231.43

Percentage 17.1% 25.3% 21.3% 20.6% 21.1%

Data sources: China Steel Statistics 2000, 2001 (State Administration of Metallurgical

Industry), China Customs Bureaux, 2002 World data – AME Mineral Economics January 2003

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China’s maximum production of iron ore was in 1997 at 268.62 million tonnes and

decreased since then, with the exception of a slight increase in 2002. This is due to the

global iron ore industry being capacity constrained. This means it is not able to

immediately produce more iron ore as market demand dictates. It can take several years

before large capital-intensive iron ore producers can increase output. These producers

react to market demand by looking at the longer-term demand characteristic and invest

in capital to enable supply output to match demand. With improvements in the

industry, iron ore price per tonne produced should become lower. Together with

international competition, steel producing countries have been seeing lower cost iron

ore being available, but this is changing due to China’s demand. China’s preference is

clearly to import while it is more cost effective to do so. In 2002 and the first half of

2003, demand from China has been difficult to satisfy. This is the reason that it has had

to increase its own domestic output. China’s demand has in fact been excessive due to

its industrialisation programme. This excessive demand results from poor planning and

is driving iron ore and sea freight prices higher.

3.6.2 Energy Consumption - Input Factor 3

China’s population increased from 982.1 million to 1,284.5 million between 1980 and

2002 and as can be expected, energy consumption has also increased. The following

charts will show that increases in energy consumption are more than just directly related

to population growth. The development of China’s economy in relation to energy

required for industry can be seen from the changing patterns of energy consumption.

The steel industry sector is a large consumer of energy, but so are many of the industry

sectors that also consume steel in their products. Table 3.9, shows the steel industry’s

energy consumption in relation to the rest of the country from 1998 through 2000.

92

Table 3.9: Energy Consumption and Steel Manufacture, 1998-2000

1998 Oil

(million tonnes)Gas

(billion M3) Coal

(million tonnes) Electricity

(billion KWh)Whole *1 country 173 20 1,295 1,160 Steelmaking*2 3.167 0.426 36.680 82.800 Percentage 1.83% 2.13% 2.83% 7.14%

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

(million tonnes) Gas

(billion M3) Coal

(million tonnes) Electricity

(billion KWh) Whole *1 country 207*2 25 1,264 1,231 Steelmaking*3 2.643 0.439 39.574 85.570 Percentage 1.28% 1.76% 3.13% 6.95%

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.

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Coa

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Japan Coal (Oil equiv) Australian (Oil Equiv)

95

Chart 3.18: Annual Crude Oil Consumption for Selected Countries, 1980-2002

Data sources: BP Australia Energy Review, 2001, 2002 and 2003

Chart 3.19: Natural Gas Consumption for Selected Countries, 1980-2002

Data sources: BP Australia Energy Review, 2001, 2002 and 2003

These energy resources are subject to international volatility. The price volatility will

not make it easy for China’s export industries that need to consume such commodities

in the future. How China manages this transition from coal to oil to gas will have an

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(billion cubic metres per day)

96

important bearing on the continued development on both the country’s comparative

advantage in manufacturing and its economy.

China’s population increased from 982.1 million to 1,284.5 million between 1980 and

2002 (30.8% increase) and during the same period its electricity consumption increased

from 382 billion KWh to 1,654 billion KWh (333% increase), and the country overtook

the consumption of the former leading steel nation, Japan, in 1995. This change in

electricity consumption is shown in Chart 3.20.

Chart 3.20: Electricity Consumption, China 1982-2002 and Japan 1990-2002

Data sources: BP Australia Energy Review 2001, 2002 and Asian Development Bank

The increases in energy consumption are more than just population growth and

demonstrate increases in productive capacity and industrialisation. It seems China has

become the “new Japan” in that its economic growth appears to be following that of

Japan. Such increases in China’s energy demand which are being driven by industrial

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97

growth are becoming a factor that looks like it could inhibit further economic growth as

energy demand outstrips supply in high consumption regions (Kynge & Harney 2003).

As a result, increased investment in liquefied natural gas plants are occurring and it is

possible that undesirable nuclear power plants may become an alternative energy source

for a developed China. According to Harney (2003) tenders for a 6,000 MW nuclear

plant have already been called. The US$8 billion plant will operate next to

Guangdong’s liquefied natural gas terminals. This energy demand supply imbalance

results from excessive industrial demand that is discussed in Chapter 6. This issue

relates to the need for better demand planning to ensure supply and demand balance for

iron ore and sea freight is achieved. Otherwise high costs associated with such

excessive demand will incur excessive costs which will impact the longer term viability

of not only the country’s iron and steel industry, but industry in general.

3.7 Trade development - Steel and Iron Ore

In relation to trade development, Table 3.10 shows for the period between 1950 and

2000 that in proportion to national imports steel imports have decreased from 8.75% to

5.55% and exports have increased from 1.27% to 1.49 %. These minor percentage

changes in import and export values show that notwithstanding the general view that

China’s steel demand has caused increased imports, when examined in perspective to

overall imports, it has actually decreased. With exports showing a slight increase to

1.49%, both results support the growing self-sufficiency of China in satisfying the

country’s demand for steel as industrialisation and infrastructure development

continues. The large growth in steel production over the same period suggests that

domestic consumption driven by infrastructure development is responsible for using up

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the country’s steel output. It is important to understand that much of this demand

consumption is value adding in that it is used for the nation’s infrastructure and has

been satisfied with domestic production and at same time decreasing steel imports in

proportion to national imports.

One can expect when the country’s domestic demand for steel decreases, China has the

potential to become a significant exporter of the steel products that it has the capacity to

produce. However, this needs careful planning and management. This is an important

finding.

Table 3.10: China Steel Industry – Trade Development, 1950 – 2000

1950 2000

National Total *1

(106 US$)

Iron and Steel

Products *1

(106US$)

% National Total *2

(106 US$)

Iron and Steel

Products *2

(106 US$)

%

Import 583 51 8.75% 225,096 12,490 5.55%

Export 552 7 1.27% 249,212 3,711 1.49% Data sources: *1 - China Steel Statistics 2000, Planning & Developing Department, The State

Administration of Metallurgical Industry pp.119-120.

*2 – China Steel Statistics 2001, China Iron and Steel Association, China Metallurgical

Information and Standardisation Institute p.126.

As China’s development continues, consumer demand for higher quality stainless steel

is expected to increase. This growth pattern is evident when we look at apparent

consumption values since 2000, see table 3.11.

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Table 3.11: China’s Stainless Steel Apparent Consumption Values, since 2000

Year Apparent

Consumption (million tonnes)

% increase

2000 1.7 - 2001 2.39 30% 2002 3.2 40%

Data Source: CEIS 0826 2003, art.023

By 2007, China’s apparent consumption of stainless steel is expected to exceed five

million tonnes. This is comparable to the total consumption of Europe (CEIS 0826

2003, art.023). Such high demand consumption is being met mainly by imports. Keen

to increase market share, stainless steel producers are increasing production capacity. In

2002, state-owned stainless steel companies produced 583,400 tonnes of stainless steel.

This represents an increase of 12.5% on 2001 production. China’s largest stainless steel

producer, Taiyuan Steel whose production capacity is 1 million tonne, produced

374,300 tonnes an increase of 16.5% on 2001 and plans to increase its stainless steel

capacity to two million tonnes within the next 3-4 years. It is estimated that private

companies now have a combined stainless steel capacity of around 700,000 tonnes

(CEIS 0407 2003, art.049 & CEIS 0404 2003 art.040). Details of other stainless steel

production capacity expansions are:

1. Shanghai No. 1 Steel Plant’s 750,000 tonnes stainless steel capacity at a cost of 11

billion yuan

2. Ningbo Baoxin Stainless Steel Company upgraded to 600,000 tonnes –completion

of its third-phase renovation at the end of 2003

3. Shanghai Tissen Krupp Stainless Steel Company’s No. 2 and No. 3 Cold Rolled

stainless steel production lines will go into operation at the end of 2004, the No. 4

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production line will go into operation the end of 2005, resulting in stainless steel

capacity of 390,000 tonnes

4. Pohang and Qingdao Iron and Steel construction of a 150,000 tonnes cold rolled

stainless steel production line

5. Jiangsu Yicheng Special Steel Company is constructing a stainless steel medium

plate plant. Completion scheduled at end of 2003 (CEIS 0708 2003, art.041).

With the mismatch in supply and demand, China’s stainless steel manufacturers are now

attempting to increase capacity to capture the loss of market share to overseas

companies. This will take a long time and is a good example of poor demand planning.

It is however, positive that capacity to make higher quality steels is improving. This is

an area that will continue to increase long after the construction boom is over. It

nonetheless must be carefully timed and managed.

3.8 China’s Iron Ore Demand

To understand China’s demand for iron ore, one needs to consider the nature of the

demand for steel. Up to and after the People’s Republic of China was founded in 1949,

iron ore imports were negligible. It was not until after the Cultural Revolution when the

government’s central planning policies towards economic development were

introduced, that its appetite for steel and in turn iron ore increased. China has abundant

reserves of iron ore, but the iron content is low between 30 and 35% and many of the

iron ore mines are located inland, far away from the large efficient steel ports usually

located close to seaports. In addition, the Chinese government’s liberalisation reform

and restructuring of inefficient industries has led to the closure of the distant, smaller

and less efficient iron ore mines. Hence, in the absence of capital intensive,

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downstream processing capability (HBI or pelleting type process plants), China’s

appetite for steel will lead to the need for increasing imports. Chart 3.21 illustrates the

increase of China’s demand for imported iron ore since 1975.

Chart 3.21: China’s Iron Ore Imports, 1975-2002

Data sources: Tex Reports – 1987 through 2000 and China Customs Bureau – 2001 and 2002

China deregulated iron ore pricing on 1 May 1993. From that time, domestic iron ore

prices have increased to similar levels as the higher quality imported ore. This made it

more cost effective for purchasing imported ore. China’s decreased domestic

production was discussed earlier, but its relationship to increased imports is shown in

Chart 3.22. The percentage of imports increased from 14.9% in 1994 to 48.2% in 2002.

This trend suggests increasing imports of iron ore and decreasing national production.

In view of the emergence of direct reduced iron process plants which enable lower

quality iron ore to be processed (beneficiated), the nature of this demand may change

over the next decade as China is likely to apply this type of process to utilise its own

lower iron content reserves of iron ore. It will also depend on whether the country can

secure low cost iron ore supplies in the future. This is an important finding. According

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to CEIS (0915 2003, art.027), China’s iron ore imports are likely to reach 170-180

million tonnes by 2005. This will represent over 30 percent of the world’s total

shipping volume of iron ore.

Chart 3.22: China's Total Iron Ore Demand, 1994-2002

Data sources: Up to 2000 - China Steel Statistics 2000, 2001 (State Administration of Metallurgical

Industry, Beijing). From 2001 – China Customs Bureau

The relationship between iron ore demand (import, domestic) and total steel production

is presented in Chart 3.23. This chart shows total steel production, the total iron ore

demand and the imported iron ore demand. It is interesting to note the improvement in

iron ore to steel ratio between 1995 and 2002 was from 3.18 to 1.87 tonnes of iron ore

to one tonne of steel produced. This shows the value associated with higher iron

content imported ores versus lower iron content domestic grades. Of course during this

period, plant efficiency improved, but plant efficiencies lower unit cost, produce better

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quality of steel and do not reduce the iron ore per tonne of steel ratio by a significant

amount.13

Chart 3.23: China's Iron Ore Demand and Steel Production, 1995-2002

Data sources: China Steel Statistics 2000, 2001 (State Administration of Metallurgical Industry, Beijing)

and China Customs Department

The dwindling reserves of iron ore are of concern for China's national security,

notwithstanding Lu’s estimate (cited in Wu 1998) of China having around 760 sites

containing a total of 472 billion tonnes of iron ore deposits, most of which are not

economically recoverable (estimated that 46 billion tonnes are proven). Pu Haiqing,

Director of the State Administration of Metallurgical Industry (cited in China Metal

Markets Iron & Steel Monthly, 14 November 2000, p.14) has called on Chinese steel

makers to launch iron ore bases abroad to fill the gap in domestic demand. The country

now has less than 18 billion tonnes of exploitable iron ore reserves. Pu Haiqing

estimated the reserves could satisfy domestic demand for only 40 years. Liu Jinghai,

13 This is in relation to developments since 1995.

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Deputy Director of the China Metallurgical Economic Development and Research

Centre, (cited in China Metal Market Iron & Steel Monthly, 14 November 2000, p.14)

advises that in addition to the direct launch of foreign bases, Chinese steel makers may

buy foreign iron ores through long-term trade agreements with resource-rich nations.

Average transport cost for imported iron ores of the Wuhan Iron and Steel Corp in

Central China's Hubei Province is 100 yuan (US$12) per tonne higher than that of

Baoshan steel (cited in China Metal Markets Iron & Steel Monthly, 14 November 2000,

p.14). This is a significant amount being around 30% of the cost per tonne of iron ore

and considering it excludes sea freight, which would be common to both Baoshan and

Wuhan, will become a major problem for those producers not closer to seaports. Not

having to rely on imports would considerably improve their supply (price) risk

exposure. According to the World Mineral Resource Strategy Research Centre, which

comes under the Chinese Academy of Geological Sciences (cited in CEIS 2003 0127,

art.038), it is important for China to find its own new mineral deposits as increasing

reliance on imported minerals will become a threat to national security. The research

centre reports that traditionally drilling depths of most Chinese mines are only about

500 metres, whereas in developed countries it is between 700 and 1,000 metres. The

centre claims that “lack of funds for in-depth geological surveys is also a major factor

behind China’s lack of mineral resources”, and that, “of China’s more than 200,000

locations with mining potential, only 20 percent have undergone evaluation”. In order

to reduce reliability on international markets for sourcing of strategic minerals and

improve the country’s probability of sustaining its strong economic development,

elevating the status of the domestic mineral resource sector with more domestic

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exploration and improved beneficiation are important for China’s future development

and industrialisation. This is an important finding.

According to the China Iron and Steel Association (CEIS 0411 2003, art.037), China’s

iron ore production increased in 2002, with an output of 232 million tonnes. This is six

percent higher than 2001. The government’s lowering of the resource compensation tax

on steelworks’ iron ore mines from 15 yuan/tonne to 5 yuan/tonne, on 1 April 2002,

took their resource compensation tax to the same level as for independent iron ore

mining companies whose resource compensation tax had already been lowered to 5

yuan/tonne in 1995. According to Zhou Jian, Chairman of China Metallurgical Mines

Association: “Management in mining companies has improved, which led to continuous

reduction of mining costs, down by an average three percent in 2002. In addition,

technical advances continued and this has lifted the grade of iron ore fine concentrates

by one percentage point and increased comprehensive usage of resources” (CEIS 0411

2003, art.037).

3.8.1 Elasticity of Demand for Steel and Iron Ore Elasticity of demand with respect to price is a measure of responsiveness of the quantity

demanded of a good to a change in its price (McTaggart, Findlay & Parkin 1995). The

higher the value the more elastic it is said to be and this means it is more responsive to

changes in what it is being quoted in relation with (with respect to term). Goods with

high elasticity of demand with respect to price means that more of the good will be

demanded as price decreases and less demanded if the price increases. A good with an

elasticity of demand less than 1 is said to be inelastic and changes in price will not have

a significant effect on demand. Modelling by Labson, Gooday & Manson (1995, pp.23-

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34) predicts consumption patterns and lists elasticities of steel demand with respect to

price and industrial production for several countries, see Table 3.12.

Table 3.12: Elasticities of Demand for Steel for Various Countries

Country Elasticity Elasticity

(Price) (Industrial production)

Australia -0.05 2.33

Brazil -0.33 3.65

China -0.28 0.38

Japan -0.04 2.12

Data source: Labson, Gooday & Manson (1995, p.40)

Table 3.12 shows positive and negative values for elasticity. By convention, we

consider only the absolute value. The negative value indicates the drop in quantity

demanded when price increases. From Table 3.12, the steel demand with respect to

price is inelastic in all the countries. So, price changes of just steel will not have a

significant impact on the quantity of steel demanded. On the other hand, the elasticity

of steel demand with respect to industrial production is significantly more substantial in

Australia, Brazil and Japan, but still very low in China. This anomaly may be due to the

demand for steel being more aligned to infrastructure construction rather than industrial

production. However, as China moves along the development cycle and has less focus

in infrastructure and more on manufacturing, this inelastic demand is expected to

change in line with normal market economics, such that as industrial production

increases, higher demand for steel will result.

107

3.8.2 Intensity of Demand To assess demand for iron ore and steel it is useful to examine the trends in

consumption in terms of GDP per capita. Chart 3.24 shows China’s GDP per capita and

iron ore imports since 1981. GDP per capita in yuan has been used in preference to

USD due to exchange rate variation occurring when the yuan was pegged to the dollar

in 199414. Both indicators show similar increasing trends and there is no doubt that we

are seeing large increases in iron ore demand as GDP per capita increases.

Chart 3.24: China’s Iron Ore Imports and GDP per Capita (Current Prices),

1981-2002

Data sources: China Steel Statistics 2000, 2001 (State Administration of Metallurgical Industry), China

Customs Bureau & Asia Development Bank

However, China’s iron ore demand (both import and domestic) depends on steel

consumption. The best way to examine the changing demand nature for steel is to

consider the intensity of steel use.

14 At this time the rate devalued from 5.76 yuan in 1993 to 8.62 yuan to the USD in 1994.

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108

Traditional economic thinking suggests that steel demand increases with increased

income. Malenbaum (1975 and 1978, cited in Tilton 1992, p.51) proposed the

“intensity of material use” theory. The intensity of use of a material is the ratio of its

consumption to GDP per capita (thousand tonnes per yuan). Malenbaum suggests that

as a country emerges from early economic development, demand for steel increases

(increasing intensity of use), then as it reaches development, there is less demand for

steel (less infrastructure construction and less demand for goods since most people have

already acquired such goods) – we then see an inverted u curve, where a peak is reached

then demand drops off, see Figure 3.2.

Figure 3.2: Intensity of Steel Use in Relation to Economic Development

Applying this principle to China’s steel consumption, the result is shown in Chart 3.25.

This shows the intensity of consumption based on China’s steel production only with

the intensity of steel consumption increasing during China’s early economic

development then after early 1980s starting to decrease – supporting Malenbaum’s

concept outlined above.

Intensity of material use

Level of economic development per capita

109

Chart 3.25: China’s Intensity of Use of Steel, 1952-2002

Data sources: China Statistical Yearbook, Asian Development Bank & International Iron and Steel

Institute

In relation to increasing GDP the increase in China’s steel consumption is not as large

as one would have expected. This doesn’t suggest that Chinese with higher incomes are

not buying cars and items containing steel, but more likely technology has decreased the

amount of steel in the traditional goods being consumed and that steel used in

construction is being better designed so as to use less tonnage. In contrast, according to

Campbell (1999), of several metals he reviewed between 1985 and 1997, only China’s

aluminium intensity of use showed any significant increase. Investment in the steel

sector has been underpinned not only by demand consumption, but also as a result of

the government’s efforts to develop infrastructure. According to the China Economic

Information Service (CEIS 0725 2003, art.38), the government has issued bonds worth

660 billion yuan to boost long-term construction. This has both increased steel

consumption and also investment in the industry.

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In 2002, China’s demand for steel was 211 million tonnes and was greater than

domestic production capacity. With global steel production during 2002 being 897

million tonnes, China’s demand represents 23.5% of the world’s steel consumption.

So China has become the world’s second largest steel importer (after the USA). The

former State Economic and Trade Commission forecasts that in 2003 domestic demand

could reach 215 million tonnes (CEIS 0725 2003, art.38). China generally had been a

net importer of small quantities of steel, but in 2002, this increased to 29 million tonnes

with most of these imports coming from Japan, the Republic of Korea, Russia,

Kazakhstan, and Taiwan. During the first 10 months of 2003, China’s steel imports

reached 31.05 million tonnes and by the end of 2003 should reach 36 million tonnes

(CEIS 1118 2003, art.34). This will make China the world’s leading steel importer.

A major driver for demand for steel and iron ore is growth in per capita income.

Income growth leads to increased consumption of steel goods such as: automobiles,

infrastructure (railroads, bridges and ports), building homes, shipbuilding, domestic

goods etc. Therefore, all else equal, growth in iron ore and steel demand should occur

in line with GDP growth as is shown in Chart 3.24. The increase in per capita income is

fuelling an increase in home construction and automobile purchases. The China

Association of Special Steel Enterprises (CEIS 1113 2003, art.034) reports that

construction of residential buildings is growing at an annual rate of over 20% and in

2002 there were 5 billion square metres of residential houses in urban area in China,

averaging 15 square metres per person. With per capita living area in developed

countries being around 35 square metres, this indicates there is still significant potential

for demand growth.

111

Increased consumer demand for automobiles will increase steel demand. There is

around 800 kg in the average passenger vehicle and automobile demand in China is

expected to rise to 3.75 million vehicles per year by 2010 (Hogan 1999). This research

found this estimate to be low (refer to the next section). In addition, increased

shipbuilding capability is expected to raise demand for steel plate to over 1.5 million

tonnes (Hogan 1999). This together, with the government’s plans for increased

infrastructure development should underpin increases in steel demand and productive

capacity through to the end of 2009.

In relation to the growth in national output, China’s intensity of steel use during the past

24 years is similar to a developed economy in that it is on the decline. This would

suggest that in proportion to other drivers of its economic development, the steel

industry appears to be taking on less significance in China’s overall economic

development.

3.8.3 Automobile Production and Steel Demand

China is very attractive for multinational companies because of its cheap labour, for

example, total automobile production has increased by around 50% between 1999 and

2002 (Matthews 2002) to 1.2 million vehicles and will continue to increase with foreign

carmakers relocating offshore to take advantage of China’s lower labour costs and

reforms. According to Du Fangci, Deputy Secretary General of the China Association

of Auto Manufacturers, China's output of motor vehicles is forecast to top 3.90-4.00

million in 2003 as the automotive industry is entering a period of growth, with private

purchases dominating the market. The industry is expected to continue a long and

112

steady period of growth (CEIS 0509 2003, art.006). Wei Jianguo, Vice-Minister of

Foreign Trade and Economic Cooperation, reinforced this when he said that China’s

demand for motor vehicles is expected to top 4.6 million units by 2005. Wei outlined

that China has become the 5th largest producer of motor vehicles in the world and

described China's present auto market as the potentially the biggest in the world (CEIS

0414 2003, art.003). Since China's entry into the WTO in 2001, considerable growth

has occurred in the automotive industry. Between 1990 and 2002, China’s output has

increased as shown in Table 3.13 (Refer to Appendix 9.4.8 and 9.4.9 for a list of car

sales and makes and regional outputs for 2002).

Table 3.13: China’s Output of Motor Vehicles, 1990-2002

Year Output (Unit: Million)

1990 0.51

1992 1.06

1994 1.35

1996 1.46

1998 1.63

2000 2.07

2002 (Jan-Oct), 2.63 Data source: China Association of Automobile Manufacturers cited in CEIS 1129 2002, art.002.

If we further examine what this increased demand for vehicles means for steel, Li

Jianshe, manager of the market department of the Maanshan Iron and Steel Co. Ltd,

forecasts for 2005 that 5.65 million tonnes of steel will be needed. This includes 3.45

million tonnes of medium plates. Extending this to 2010, the steel consumption could

reach 7.27 million tonnes, including 4.52 million tonnes of medium plates (CEIS 0319

2003, art.006). This demand increase is further supported by Chen Hong, Vice-

President of Shanghai Automotive Industry Corporation Group and General Manager of

113

the Shanghai General Motors Corporation Limited, who reports that 150 million

families in China, involving a population of 500 million, are expected to buy

automobiles in the next 10 to 15 years, with this having the potential to make China the

leading car market in the world. The Shanghai Automotive Industry Corporation Group

hopes to achieve its objective of “selling up to one million cars with no less than 50,000

national brand names by 2007, ranking itself in the list of the Fortune 500” (CEIS 0313

2003, art.004).

3.8.4 Shipbuilding and Steel Demand

China’s demand for heavy and medium flat steel plate for shipbuilding is increasing

along with that industry’s growth. The China Economic Information Service (CEIS

0514 2003, art.009) clearly outlines the increasing role being played by China in the

international shipbuilding market:

China is aiming to become the world's No.1 shipbuilder and for the eighth

consecutive year in 2003, China ranked 3rd in terms of dead weight tonnage (dwt)

of the global international shipbuilding market, behind Japan and the Republic of

Korea. China entered the international market around 1979 and when the open

door trade reform started in the early 1980s held 17th position. At this stage,

China’s share of the international shipping market was between 400,000 tonnes

and 500,000 tonnes annually with only 1% of the international market. In 2002,

China manufactured ships with a combined tonnage of 4.61 million tonnes15

making up 9.7 percent of the world's ship production. Over 70% of the ships that

15 This refers to the deadweight, ie the weight of the ship plus its total load.

114

are built in China are exported worldwide. The value of ship exports for 2003 is

expected to be around US$2 billion.

To capture the larger vessel market, the industry is also improving its shipbuilding

technology. According to Gu Baolong (CEIS 0609 2003, art.017), Board Chairman of

the Hudong-Zhonghua Shipbuilding (Group) Co. Ltd16, the company has made

technological progress so that they could build large-capacity container ships with

8,100 twenty-foot equivalent units (TEUs). This is an increase from its largest ship put

into service in May 2003, of capacity 5,688 TEUs, built for the China Shipping Group

Corporation.

The China Shipbuilding Industry Corporation (CSIC) is one of China's top two

shipbuilding giants and is China’s biggest shipbuilding company for military and

civilian vessels. Li Changyin (CEIS 0117 2003 art.015), President of The China

Shipbuilding Industry Corporation (CSIC) says that his company built 69 vessels in

2002 of total value 11.8 billion yuan (1.42 billion US dollars). China’s other largest

shipbuilder, the China State Shipbuilding Corporation (CSSC), is boosting its

competitive position by consolidating its domestic branches into five major shipbuilding

bases, as reported by Chen Xiaojin, president of the CSSC. The five major bases are the

Jiangnan Shipyard Group, Hudong Shipbuilding Group, Waigaoqiao Shipyard in

Shanghai, Guangzhou Shipbuilding Company and a combination of shipyards in

Shanghai and Jiangyin. The company plans to import more technology skills and

administrative concepts to maintain China's shipbuilding industry at the leading edge of

the international shipbuilding market (CEIS 1127 2002, art.012).

115

The President of CSIC, Li Changyin (CEIS 0120 2003, art.046) reports that by 2010,

about 45 million tonnes of vessels will be needed annually in the global shipbuilding

market, and the annual vessel order from domestic shipping companies from 2001 to

2005 will top two million tonnes. This implies an annual growth rate between 8 and

10%. The Corporation plans to increase its annual vessel output to eight million tonnes

by 2020 in order to meet the surge of market demand.

According to the director of planning at China's State Administration for the

Metallurgical Industry, Li Shijun (September 2000), China’s rapid growth in apparent

consumption of steel during the 1980s and 1990s should slow down as demand shifts to

the use of higher quality products. He forecast apparent consumption is going to be

around 140 million tonnes in 2005.

With the government underpinning investment in construction, increase in per capita

incomes leading to higher consumption domestic goods including automobiles and

increase in shipbuilding there is no doubt demand for steel and in turn iron ore will

continue to increase.

3.9 Iron Ore Supply Characteristics

The supply of iron ore to China is characterised by fierce international competition,

market and capacity constraints. Capacity constraints make it difficult for iron ore

producers to respond to sudden demand and associated price increases. It will take iron

ore producers several years to upgrade plant and port facilities with a view to increasing

supply. The resource input is not regulated and in fact, the Chinese government

16 One of China’s major shipbuilders.

116

supports imports and free trade conditions. China’s principal supply sources of iron ore

from 1975 through to 2002 are shown in Chart 3.26.

Chart 3.26 Principal Sources of China’s Iron Ore Imports, 1975-2002

Data sources: Tex Reports – 1987 through 2003

2001 on from China Statistics (re China Customs Bureau)

Chart 3.26 shows Australia being China’s leading source of iron ore followed by Brazil

and India. Imports from Brazil and India have grown at a faster rate than Australia due

to China’s effort to diversify market supply together with capacity constraints in

Australia which prevented producers meeting China’s increased demand. This has

caused Australia to lose potential sales. Brazil and India’s increased share has occurred

since 1997 at which time imports from Australia, Brazil and India were 30.97, 7.81 and

6.10 million tonnes respectively. In 2002, imports from Australia, Brazil and India

were 42.80, 29.77 and 22.53 million tonnes respectively. This is a significant increase in

imports from Brazil and India. The iron ore industry is capital intensive and as a result,

iron ore producers have difficulty to rapidly increase production and shipments and thus

are not able to respond to short run increases in iron ore demand. In general, only

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limited stockpiling is carried out (mainly to the extent of insuring against short term

ship loading interruptions). In the international arena, Brazil and India are the main

competitors to Australia and this is shown in relation to tonnages to China. The

company CVRD is Brazil’s major supplier and the world’s largest supplier. Brazil also

has the highest quality of iron ore up to 2 percent higher than Australia. Its largest

producer, CVRD, is keen to position itself to be a dominant player in all global markets.

Brazil dominates the European markets and Australia dominates the Asian markets. To

capture more Chinese market share for iron ore, Brazil is developing several joint

ventures with China. Australia’s proximity to Asian and in particular, Chinese markets,

give it a shipping advantage: around 6,000 km from Australia versus around 20,000 km

from Brazil. Shipping/transport costs represent the most significant cost in supplying

iron ore. The main threat to Australia’s shipping advantage lies in China’s development

of larger and deeper ports, which are capable of handling larger ships. This will lower

unit-shipping costs and together with their better quality ores provide Brazil and India

with valuable opportunities to threaten Australia’s large share of China’s iron ore

market. This is discussed in more detail later.

3.9.1 Iron Ore Supply Elasticity Elasticity is a measure of the responsiveness of quantity supplied to a change in price.

The short run elasticity relates to quantity supplied when only some adjustments to

input factors have been made; whereas, long run elasticity relates to how quantity

supplied responds when all possible input (technological) factors have been adjusted.

Table 3.14 shows estimates of iron ore supply elasticities for several countries up to

2000 (Labson, Gooday & Manson 1995, p.45). When the supply elasticity is small

price changes do not have a significant impact on quantity supplied. In the longer term,

after all technology changes have been done, quality improvements (higher unit iron

118

contents) lead to moderately higher elasticity values, but still inelastic. This is not

surprising given that there are few substitutes for iron ore; at least while steel is the

preferred construction material.

Table 3.14: Iron Ore Supply Elasticities – short and long run

Country Short run long run

Australia 0.30 0.43

Brazil 0.26 0.66

China 0.13 0.85

India 0.10 0.72

Table 3.14 shows that in the longer run, supply to China will be slightly more elastic

which should still provide encouragement to iron ore suppliers that prices will improve.

During 2003, this has occurred with China being more concerned with actual supply

than on the price of that supply. This has caused a shift to supplying the Chinese

market rather than other markets. The effect of this is increased global pricing, iron ore

suppliers being keen to increase production, although capacity constraint has been the

major barrier. The biggest threat to Australia’s iron ore trade with China is that as

technological improvements combined with a more sustainable demand level make

China’s supply less inelastic, then sales to that country will be affected, putting pressure

on supply price levels. This is what the Chinese authorities should be planning and

working towards. It does not seem that this planning is occurring. This is an important

finding.

To understand supply curve characteristics, one should consider the type of market iron

ore producers operate in. Tilton (1992, p.53) distinguishes between two metal markets:

119

“producer markets and competitive markets”. Producer markets are where producers

have more opportunity to dictate price levels. Competitive markets are where the

market sets the price and the producers follow that price. Iron ore traditionally operated

in a producer market, however, with the introduction of Indian producers and

improvements to Brazilian producers, competitive markets have emerged. Even

although they are able to affect supply to some extent, Australian producers have

become price takers. High entry costs create effective barriers for the iron ore industry.

This creates opportunities for current large players to dominate the market place and

“tilt the playing field” so that producer markets re-emerge. Mergers and buyouts in the

iron ore industry suggest this process is in place. Bigger players are becoming larger;

the smaller producers are becoming fewer. This trend will have serious consequences

for China’s future sourcing ability. China needs to be aware of this and should be

making appropriate contingencies such as long-term overseas deals and equity in

producer operations. These dynamics will shape future iron ore sourcing negotiations.

This is an important finding.

The long term outlook for China’s iron and steel industry which continues to increase

capacity and output is securing reliable sources of low cost iron ore raw materials. It

has been shown that Australia has played an important role in supplying China’s iron

ore needs. With Australia being close to China geographically, iron ore imports from

that country should continue to be the most cost effective for China. How Australia’s

role in supplying China evolves will be very important for both China and Australia.

120

4 Australia’s Role Supplying China’s Steel Industry

4.1 Australia’s Role in Supporting China’s Economic Development

Australia with its abundant resources of high grade iron ore and being closer to China

than its competitors has been well positioned to play an important role in the

development of China’s iron and steel industry. Imports of iron ore to China from

Australia have increased from 1.4 million tonnes in 1975 to 42.8 million tonnes in 2002

and at all times during this period, Australia has been China’s leading supply source.

This has resulted in a symbiotic relationship such that both countries’ economies are

inextricably linked. Therefore, how this trade has and will develop is important for both

countries. This Chapter examines the role that Australia has played in its trade with

China and how this will develop. It looks at trade development between each country

and shows that China has become Australia’s 3rd leading trading country after Japan and

the USA. With this background, trade in iron ore is examined in detail concluding with

the outlook for the future of trade in this commodity with China.

4.1.1 Trade between China and Australia

Notwithstanding Australia’s large and growing exports of iron ore to China, Australia

has been running a trade deficit with China since 1989 when it was US$19 million.

Since that time, the deficit has steadily increased to US$2.46 billion in 2002. Whether

this deficit will shrink at some stage in the future will depend significantly on the value

of mineral resources that Australia can export to China and on its import value of

manufactured goods decreasing. This will depend on the extent of increased trade with

China at the cost of other Australian trading partners.

121

Chart 4.1: China's Trade with Australia, 1981-2002 (At exchange rate A$1 =USD 0.55)

Data sources: Department of Foreign Affairs and Trade (DFAT) 2001, 2002 and 2003

Chart 4.1 shows China’s trade with Australia between 1981 and 2002. Up to 1988,

Australia had a trade surplus with China. This changed to a deficit of US$19 million

during 1989 and thereafter the deficit has both continued and increased. In relation to

this research, it is necessary to examine the significance of iron ore trade. Chart 4.2

shows Australia’s top six export commodities to China since 1996.

Chart 4.2: Australia’s top 6 Export Commodities to China, 1996-2002 (At exchange rate A$1 = USD 0.55) Data sources: DFAT 2001, 2002 and 2003

0

1,000

2,000

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Import from Australia

Export to Australia

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Wool Iron OreCrude Petroleum CoalCopper Ores Aluminium

122

Traded iron ore to China has been a significant commodity for Australia. After

alternating leadership between 1996 and 2000, trade in iron ore overtook wool as the

leading commodity in 2001. Crude oil exports, the 3rd largest export commodity

moderately decreased during 2000 then improved in 2001. It is expected that as

China’s demand for energy increases while the country tries to reduce consumption of

domestic coal, its petroleum and gas demand will continue to increase. This should

provide Australia with an opportunity to increase its export of energy products to China.

Chart 4.2 shows that Australian exports are made up of resource commodities that

enable China as an industrial nation to add value to them. This is evident through the

use of the end product for construction materials, to improve infrastructure and

industrial productivity or with wool, which is used in the clothing industry and is a

major export business for the country. In comparison if we examine what Australia

buys in return for its commodities we see from Chart 4.3 that the imported goods are

mainly for personal consumption, with the exception of computers, goods which do not

add much value.

Chart 4.3 Australia’s top 5 Import Commodities from China, 1996-2002 (At exchange rate A$1 = USD 0.55)

0

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300

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600

1996 1997 1998 1999 2000 2001 2002

Mill

ion

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Clothing of textile fabrics Toys, games & sporting goodsFootwear ComputersWomen's/Girls' clothing

123

Data sources: DFAT 2000, 2001 and 2002

China’s exports to Australia are made up of value added manufactured goods. How

long China will maintain its competitive export position will depend on how long it

takes other developing economies to catch up. China’s current low cost of factor inputs

together with a perceived undervalued exchange rate should give it an advantage for

many years to come.

Salomon Smith Barney (cited in Balfour 2002) estimates that between 2002 and 2005,

the sales of goods from Asia to China could increase by between 55 and 85% - this

representing US$70 billion additional trade. Australia should be aiming for a

proportion of this trade. A breakdown of Australia – China’s trade for 2002 is shown

in Appendix 9.14.4.

In 2002, China was Australia's third largest trading partner after Japan and USA with

total bilateral trade being US$11.67 billion17 (see Table 4.1). According to the deputy

chairman of the China-Australia Chamber of Commerce (cited in CEIS 0818 2003,

art.16), “Economic cooperation between China and Australia is exciting,". The China

Economic Information Service (CEIS) reports that bilateral trade for the first half of

2003 was US$6.05 billion. This represented an increase of 31.9 percent year-on-year.

For the same period, China's exports to Australia increased by 37.7 % to US$2.62

billion and imports increased by 27.8 % to US$3.42 billion.

17 In the same year, Australia’s trade with Japan and USA was US$20.85 and US$19.07 billion respectively.

124

Table 4.1: Australia’s Merchandise Trade With its Top 5 Trading Countries 2002

Data source: DFAT 2003

China is an important trading partner for Australia. Chart 4.4 shows Australia’s leading

export trading countries. Trade with China continued to increase in 2002, while at the

same time, it started to decrease with Japan and USA. As China continues with its drive

to industrialise and increase trade with other countries, demand for Australian

commodities should increase thus increasing Australia’s trade potential, which will be

at the expense of USA and Japan. According to Mark Rider, UBS Warburg Australia’s

Chief Economist, “China is on track to become Australia’s largest export destination by

2012, this growth coming mainly from metal ores” (cited in Trounson 2003, p.M2).

Chart 4.4: Australia’s Top 5 Merchandise Export Markets, 1996-2002

(At exchange rate A$1 = USD 0.55)

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

0

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6,000

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10,000

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14,000

1996 1997 1998 1999 2000 2001 2002

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ion

US

$

Japan United StatesRep of Korea New ZealandChina

125


Chart 4.5 shows Australia’s top 5 import markets. Imports from all with the exception

of United Kingdom increased; the largest increase was with China. Since 1996, China

exports to Australia increased from US$2.267 to US$7.066 billion (an increase of

212%). Over the same time, China’s trade surplus with Australia grew from US$0.13

billion to US$2.46 billion (Department of Foreign Affairs and Trade, 2000, 2001, 2002

and 2003). During the same period, import trade with the other top import markets saw

a reduced rate of growth. This should provide trade negotiators with a good opportunity

to increase exports and also to negotiate better deals on the imported goods.

Chart 4.5: Australia’s Top 5 Merchandise Import Markets, 1996-2002 (At exchange rate A$1 = USD 0.55)


0

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4,000

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1996 1997 1998 1999 2000 2001 2002

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$

United States JapanChina United KingdomGermany

126

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


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


World Total 60,722,734 49.31 64,320,601 48.57 (3,597,868) 125,043,335 48.93


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

0

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131

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.

0

10

20

30

40

50

60

70

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19751976

19771978

19791980

19811982

19831984

19851986

19871988

19891990

19911992

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Japan China

South Korea Taiwan

Europe Others (diff from total)

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.

0

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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.

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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


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

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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


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.

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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,

148

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.

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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


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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.

158

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

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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:

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• 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:

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• 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

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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.

166

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.

170

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

172

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

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Mill

ion

US

$

173

investment in relation to impact on iron and steel demand can be seen from Chart 5.6. It

shows a breakdown of China’s direct foreign investment for 2001.

Chart 5.6 Breakdown of China's Direct Foreign (FDI) Investment for Year 2001

(Total FDI2001 = US$46,878 Mn) Data source: National Bureau of Statistics 2002, China Statistical Yearbook 2002, p.634.

Chart 5.6 shows the significance of the manufacturing sector which is a major consumer

of steel products. At US$30.9 billion, it is by far the largest benefactor of foreign

investment37. Such large investment in manufacturing along with the competitive

resource costs has the potential to both enhance and sustain China’s trading

performance in the coming years. This is a positive finding that will impact on the

continued viability of the country’s iron and steel industry.

In relation to China’s future trading performance, it is important to consider trends in

fixed asset investment in the country. Fixed assets include factories, warehouses and

$0$2,500$5,000$7,500

$10,000$12,500$15,000$17,500$20,000$22,500$25,000$27,500$30,000

Constr

uction

Educa

tion,

Culture

& Arts

, Rad

io, Film

& TV

Farm

ing &

Fishery

Healt

h Care

, Spo

rts &

Social W

elfare

Man

ufacturin

g

Mini

ng & Q

uarry

Real

Estate M

anag

ement

Socia

l Serv

ices

Trans

port, Stor

age, P

ost a

nd Tele

com S

ervice

s

Utili

ty (E

nerg

y & W

ater)P

rodn &

Supply

Whole

sale &

Reta

il Trad

e & C

aterin

g Services

Other S

ector

s

Mill

ion

US$

174

shipbuilding yards. This type of investment will give an idea of the value adding

potential that results from asset investment and expenditures - as long as the fixed assets

are indeed value adding. Chart 5.7, shows fixed asset investment for 1981-2001.

Between 1981 and 1991, fixed asset investments grow from US$55 billion to US$103

billion averaging a modest US$4.8 billion per year growth. As China’s economy

started to rapidly develop, fixed asset investment grew from US$103 billion in 1991 to

US$449.6 billion in 2001, this averages US$34.7 billion per year growth.

The China Economic Information Service (CEIS 0306 2003 art.032) reports that the

value of foreign funds used in fixed asset investment was 140.6 billion yuan in the first

11 months of 2002, rising 23 percent year-on-year, of which 96.0 billion yuan was

foreign direct foreign investment, up 35.2 percent. China's total investment in fixed

assets is estimated to exceed 4,000 billion yuan, an increase of more than 16 percent

year-on-year, which is a record high since 1996. Further details of the CEIS report is

in Appendix 9.13.

37 In 1999, it was US$22.6 billion and in 2000 it was US$ 25.8 billion (National Bureau of Statistics, 2001, 2002, p.634).

175

Chart 5.7: Total Fixed Asset investment in China, 1981-2001

Data sources: Data up to 2000 – National Bureau of Statistics 2001, China Statistical Yearbook

2001 and 2001 data - China Statistical Yearbook 2002, p.176.

What was the level of foreign investment during this large annual average increase of

US$33 billion per year growth in fixed asset investment? Chart 5.8 shows the value of

foreign funds used in China’s total fixed asset investment since 1981. After 1996,

foreign investment in fixed assets actually started to drop. This would have been as a

result of the slower world economic activity following the Asian economic crisis. At

that time, China would have been self-funding its increased expenditure on fixed assets.

A modest increase occurred between 2000 and 2001.

0

50

100

150

200

250

300

350

400

450

500

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Bill

ion

US$

176

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

1994

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

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(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).

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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.

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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

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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.

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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

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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

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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

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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.

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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

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0

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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.

0

1

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194

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

199

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


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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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

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liability ratios, it seems that foreign external debt should not be a problem. This will be

the case as the economy continues to be sound. The risk of instability may increase if

the currency is floated and funds are removed from the country over a short period.

This is an important finding that supports continued sound development of China’s

industrialisation and economic development programme.

Chart 5.14: Total Reserves as Percent of International External Debt (China Compared

to Indonesia, Korea and Malaysia , 1981-2001


Chart 5.14 shows China’s total reserve to international external debt ratio has been

growing steadily since 1993 well ahead of Korea, Malaysia and Indonesia. Vietnam

was not shown since its total reserves to total debt ratio was consistently very low,

ranging from 0.17% in 1984 to 12.7% in 1999. On the other hand, Singapore was also

not included because of its high total reserves to total debt ratio. Singapore’s average

value for the period 1981 to 2000 was 536%. Interestingly enough, both Taiwan and

Hong Kong have also high total reserves to total debt ratios. The increasing total

reserves to international debt ratio for China are encouraging, but this measurement is

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easily impacted in the event of a drop in the country’s reserves brought on by a

downturn in economic conditions. Nevertheless, this is still encouraging.

It would seem that China’s financial debt concerns are in relation to the government’s

guaranteed public debt, where the country’s very high NPLs have been backed. It is

this area that requires addressing. Such high public debt can be supported while foreign

investment and trade surpluses continue but support can come to an end quickly

especially in the event of an appreciation of China’s currency. Chart 5.15 shows the

increasing guaranteed public debt increasing since 1981, dropping in 1998, and then

continuing to increase. At US$91.7 billion in 2001 it is much higher than Indonesia,

Korea and Malaysia. However, in relation to the size of the economy, the level is not

considered seriously high. The government should still ensure that by the time any

change to the country’s economic development occurs, public debt is appropriately

managed.

Chart 5.15: Guaranteed Public Debt (China Compared to Indonesia, Korea & Malaysia),

1981-2001


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5.8.3 Reform Generated Unemployment – Threat to Economic Stability The communist party refers to China’s economic system as being a “socialist market

economy with Chinese characteristics”. It seems this variety involves an element of

private enterprise combined with government intervention and is considered more likely

to be successful than European or American systems (Wolf 2002, pp.48-49). However,

this reform will have major social consequences in relation to the unemployment it is

generating. This has the potential to seriously impact social order in the country.

According to O’Donnell (August 2000, p.29) China’s steel industry appears to be

“biting the bullet of reform” as central planners realise that the tough decisions can no

longer be avoided if the industry is to become a lean and mean competitor. This is

leading to the central government shedding hundreds of thousands of excess workers

and closing dozens of inefficient plants.

By the end of 2002, the Ministry of Labour and Social Security (cited CEIS 0213 2003)

reported that China has 7.5 million registered unemployed people in cities, which

represents a jobless rate of about 4 percent. According to the China Economic

Information Service, this does not count the 120-150 million surplus rural labourers or

the other 10 million laid-off workers who remain on labour contracts with their

employers under government-brokered arrangements and around 700,000 idle college

graduates. The report states that a one-percentage point increase in the unemployment

rate represents the loss of work for an estimated one million residents. China’s current

unemployment rate is expected to jump to 7% (Li 2001). Chiu (2002) sees increased

competition from foreign companies aggravating this acute employment situation.

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The results of such reform is becoming evident, the Information Centre for Human

Rights and Democracy Beijing (cited in the Agence France-Presse 2000, 28 September)

reported that five hundred steel workers blocked a key railroad line in southern China

for six hours in protest over fears of losing their jobs. Protests are becoming

increasingly common in China as people see it as the only way to get the government's

attention. The report outlined that in 1999, 100,000 protests occurred, compared to

60,000 protests in 1998. The unemployment issue has the potential to increase social

tensions and is a major threat to the stability of China’s economy and the subsequent

viability of the country’s iron and steel industry.

At the same time that rising unemployment is occurring with former industrial workers,

widening disparities in standard of living and in incomes between rural and urban

workers is taking place. Chart 5.16 shows rural net per capita annual income and urban

disposable per capita annual income levels from 1978 to 2001. In 1978, the difference

between them was 209.8 yuan. At this time net rural income was 38.9% of urban

disposable income. In 1983, even although the difference between rural and urban

incomes increased to 254 yuan, rural net income as a percentage of urban income had

increased to 54.9%. This still reflected an economy in which agriculture played a

significant part. However, it was now the Sixth Five-Year Plan period, a time of

increasing trade with the western world. From this time, as industrial production49 grew

along with GDP, the gap widened to 5,227 yuan in 2002. This represents 32.1% of

urban income.

49 See Charts 3.6 and 3.8 showing GDP, industrial and agricultural production.

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Chart 5.16: Comparison of China’s Rural and Urban per Capita Annual Income, 1978-

2002

Data sources: China Statistical Yearbooks, 2001, 2002

This increasing disparity in income levels will worsen the plight of rural households,

increase social tensions and accelerate changing skills. This situation together with

industrial sector unemployment has been recognised by the World Bank (Dahlman

2001), whose report outlines that to sustain poverty-reducing growth over the course of

the decade ahead, China will need to:

• Look after the interests of over 300 million farmers and create between 100-200

million new jobs for people moving out of agriculture and state-owned

enterprises

• Maintain growth and competitiveness by tackling inefficient state-owned

enterprises and non-performing loans, and diversifying Chinese goods and

services

• Sustain the environment

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• Reduce regional inequalities and invest in education of its people. According to

the Economist magazine (The Economist 2003), China only spends 2% of its

GDP on education while the United Nations recommends 6%. The USA spends

around 5% (Wessel 2003).

So far only around 6 million jobs with 8% growth have been created, so if China was to

face lower growth levels as the world economy slows, this would provide real

challenges for the Chinese government (Batson 2001).

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6 Findings

After quantifying the global iron and steel industry it could be seen that the industry has

been and still is a major contributor to a country’s economic wellbeing. It therefore, is

no surprise that Chinese leaders were found to be very keen to possess such an industry.

The research on historical and cultural characteristics relating to the development of a

strong iron and steel industry showed that Mao Zedong had a sound vision. He and

other leaders understood that a robust domestic iron and steel industry would facilitate

the nation’s development. This research confirms that strong leadership together with

centralised planning pulled the nation together. It has shown that a relationship exists

between China’s steel industry and the country’s economic performance. Many

mistakes were made in satisfying the vision of an economically strong China.

Centralised control on its own was not enough, social and market reforms moved the

country to being market based and attracted foreign investment which facilitated

increased fixed asset investments with resulting increases in productive capacity and

infrastructure. The country’s increased productive capacity provided people with

higher incomes. This created and drove domestic consumption; the resulting demand

being satisfied by the nation’s domestic output.

The research results provide an outline of a model – the Chinese Model - that may help

legislators and scholars in both developing and developed economies better understand

and apply its features and characteristics to help them work towards some of the

successes achieved by China. It shows how an economy can be changed from being

centrally directed and agriculturally based to being one driven by industrialisation and

global trade resulting in a transformation to one of the world’s leading industrial and

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trading nations. The development of a national industry like the iron and steel

industry50 that satisfies the demand needs of the nation such that it does not rely on

expensive imports should lead to creating better conditions for improving the nation’s

economic development and wellbeing.

Successive Chinese leadership’s decisions to put planning emphasis on the steel

industry, while reforms freed up controls over the rest of the economy is supported.

Such an emphasis along with reforms enabled competitive markets to take an increased

role in investment and production decisions. The research project’s findings are

summarised and discussed as follows:

6.1.1 Key Research Findings Clearly, China’s iron and steel industry has played a major role in developing the

country. Using its comparative advantage of low labour costs, it has delivered the

nation a productive capacity that it can continue to build on. The research found that

the country’s iron and steel industry continues to grow. Whether the success to date

will be sustained, depends on how planners manage to match productive output to a

changing global market place. This will be particularly important following the end of

China’s current infrastructure boom, which is likely to occur after the 2008 Olympics.

The research’s key findings were in identifying shortfalls and weaknesses in the model

that have the potential to derail the viability of the industry after 2008. The key

findings are in the following areas:

• Demand-planning

• Security of supply of iron ore

50 Other major industries could have the same potential. This will depend on comparative advantage.

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• Reform in the financial sector

• Structure of the industry and

• Managing the backwash from an industrialisation boom.

Demand-planning

The research identified that China’s continued infrastructure programme could increase

the country’s share of global steel production from 20% in 2002 to 30% in 2010. This

rapid growth in such a short period suggests lack of a national planning strategy with

too much emphasis on infrastructure development in a short time period. This caused

large demand shifts in iron ore and bulk carriers that could not be satisfied with global

supply both in the short to medium terms. The result of this supply and demand

mismatch has seen increased iron ore costs, loss of buyer discounts and large increases

in sea freight costs51. If this mismatch continues, China’s steel production costs will

become uneconomic – the result in an ideal market would be large demand reductions

or shifts to purchasing steel from other markets that may find its way to the mismatched

market. In China, domestic production would continue at least through to 2008,

building up capacity for construction steel products. The end result will have serious

consequences for the industry. It is important that infrastructure construction is planned

in relation to a sustainable productive capacity in the country’s steel industry. Such an

initiative is necessary and needs to include appropriate plans to ensure it puts downward

pressure on iron ore and sea freight pricing.

51 These costs are becoming highly inelastic - increased price is not changing quantity demanded.

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This can be done by driving technological improvements combined with a more

sustainable demand level making supply less inelastic. Sea freight logistics will be a

major factor in China’s future sourcing plans. With 3 years lead time for new dry cargo

carriers resulting from urgent demand for double hulled oil tankers, better demand

planning (delaying non-essential infrastructure construction) would also better match

the shipbuilders capacity to build more dry cargo vessels. This would very likely result

in significant reductions in sea freight costs.

According to Lundgren (1996), research suggests that sea freight costs will not increase,

but in real terms should decrease as economies of scale and new technology are

introduced. In addition, China’s infrastructure development programme - constructing

larger and deeper ports, which are capable of handling larger iron ore vessels should

help lower unit sea freight costs and will improve its ability to improve sourcing

alternatives. In the longer run, this will put downward pressure on supply pricing and

provide Brazil with valuable opportunities to be more active in the China market and

threaten Australia’s increasing share of trade with China. How can Australia prepare

and counter this threat of lower shipping cost differentials and in turn help lower

China’s raw material input costs? A number of possibilities arise:

• Change the nature of the product being shipped - start adding value to it by utilising

downstream processing (direct reduced iron, pellets made from fines and/or hot

briquettes). By changing the nature and quality of the product it also helps to reduce

degradation of product quality during loading, at sea and unloading. This increased

use of beneficiated iron ore will also help compensate for both declining grades of

iron ore and declining real prices. The approach could be supported by China’s

increasing use of electric arc furnaces for steel making.

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• Australian producers should work closer together, sharing developments and even

infrastructure. Australian iron ore producers’ operations are in the same region of

Western Australia and in some cases they are adjacent to each other. At the same

time each producer has to build almost identical complex high capital infrastructure,

which is also costly to operate and maintain. So by not sharing the use of

infrastructure, Australian producers will incur higher production costs and are not

achieving optimum allocation of economic resources. Working together with

research, planning and use of capital would help Australian producers maintain

better profit margins while lowering product costs to its important customers. This

would benefit China’s steel industry by reducing input costs, which in turn would be

positive for improved bilateral trade with Australia.

• Backloading of ships with some other commodity could also be part of a counter

trade deal. The ABARE (2002) reports that Brazil is in fact gaining market share

through purchasing coal from China, then returning backloaded with iron ore. This

was also mentioned by Liu Qi (1966), Executive Vice-Chairman of the Board China

Iron and Steel Industry and Trade Group Corporation

All else equal, high fuel prices and sea freight war premiums should increase China’s

purchases of iron ore from Australia. However, this research found that contrary to the

expected lowering of sea freight rates, as a result of excessive increased demand for

iron ore bulk carriers and the shortage in supply of these carriers, rates are increasing

and it appears they will continue to rise.

China has been moving away from centralised government control over purchasing iron

ore to one where the steel mills are free to import their own. This has led to a market

214

structure having many purchases of relatively small quantities. This research identified

an important lesson for China which is to copy Japan, where consolidators and large

trading groups purchase iron ore on behalf of the steel producers. These purchasers are

few and buy very large quantities of iron ore. They are skilful at purchasing and do an

excellent job of maintaining downward pressure on iron ore prices. Unless appropriate

strategies are put in place, China will have difficulty in making this progression to

optimum world class sourcing practice. If China can successfully adopt this approach,

it would make it more difficult for iron ore producers to secure favourable commercial

conditions and higher prices. It seems Chinese culture prefers this sourcing task to be

performed within the steel 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.

Myers and Barnett (1985) conclude in their study that economic growth is aided if

mineral prices are falling relative to other goods and will be hindered if mineral prices

are increasing relative to other goods. This is precisely what is occurring in China’s

major industry - the steel industry. If China does not address its demand planning, iron

ore and sea freight costs will continue to increase. This increase has been shown to be

due to China’s continued high steel demand for construction. As a result of Chinese

demand for iron ore, spot sea freight rates increased from around US$9 per tonne to

around US$27 dollars per tonne. Losses on discounts and higher iron ore costs are

estimated to have or will have added around US$10 per tonne. As outlined earlier,

China’s iron ore imports are likely to reach 170-180 million tonne by 2005 (CEIS 0915

2003, art.027). This means that China could be paying around US$28 per tonne more,

i.e. US$5 billion dollars per year more for its imports of iron ore than it would have

215

paid if better demand planning was in place. With price rises of between 9 and 13%

predicted for 2004 (AME Mineral Economics 2003, p.1), the additional import bill

could be increased another US$0.5 billion. These cost increases also extend to steel

prices which are reported to have increased between 7.1 to 20% during the first 10

months of 2003 (Asian Wall Street Journal 2003, p.A4).

Security of supply of iron ore

An important finding was the increasing need for China to put in place appropriate

strategies to ensure security of supply of iron ore. The need for this was outlined

clearly in the World Mineral Resource Strategy Research Centre’s report on the need

for China to find its own new mineral deposits as increasing reliance on imported

minerals will become a threat to national security. This has been recognised by China's

Ministry of Land and Resources with their approval of a 31 provincial-level mineral

exploration programme (cited in CEIS 0116 2003, art.033). According to Pan Wencan,

director of Planning Development under the Ministry of Land and Resources, it is the

first time that China has set up and approved provincial mineral exploration

programmes since 1949. Pan Wencan outlined:

The establishment of the programmes would improve the efficiency of the

exploration and the efficiency of the use of the country's mineral resources. It

will also guarantee the sustainable development of the country's mining industry.

China's mining industry has a long history of problems, such as surpluses,

shortages, the inefficient use of mineral resources, excessive exporting of the

country's rich mineral resources, including tungsten, rare earth, fluorite and

barite, and a negative environmental impact. The above problems have impeded

the sustainable development of the country's mining industry. The newly

approved provincial-level mineral resources exploration programmes are

216

expected to help guarantee the sustainable development of the mining industry

through the following six initiatives (CEIS 0116 2003, art.033):

• Intensifying the search for new mineral resources near large and medium

sized mines

• Strengthening the macro-control of the exploration and use of mineral

resources

• Utilising mineral resources in a more rational and scientific way

• Extracting some rare minerals in an environmentally friendly manner

• Building a stable mineral resource supply system

• Building a "green mining industry" in China by adopting more ecological

environmental protection measures while mining mineral resources.

Chinese authorities need to be aware of this and will be making contingencies such as

long-term overseas deals and equity in producer operations. The mining industry in

China is a significant contributor to the economy. In 2001, it contributed 400 billion

yuan to the country’s gross domestic product (GDP) last year, or roughly four percent

of GDP (CEIS 1203 2002). China’s mining industry has not been well managed.

Exploration, output and safety performance have not been optimal. Improving the

efficiency of both exploration and mining will significantly support and help sustain

China’s industrialisation programme by reducing the reliance on mineral imports.

China is endowed with most of the natural resources that it requires. It has resource

reserves spread over the entire country. Many of the country’s resources are focused in

the Western Region, an area that could do with increased economic activity. This

initiative will assist in making China’s infrastructure development programme more

cost effective in that it can be better utilised in transporting minerals to plants that will

process them.

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Poor demand planning for steel has led to China paying around US$28 per tonne more

for its iron ore imports (including freight), this is costing China approximately US$5

billion per year. A similar situation is likely to be occurring with other mineral

resources. More exploration increases the chances of finding iron ore reserves and

focus on the mining industry will improve the country’s capability to beneficiate the

lower grade ore reserves.

In addition to lowering demand for mineral imports, increasing unemployment has been

shown to be a major weakness in China’s economic growth; a vibrant mineral resource

industry in China will help support employment improvement programmes in rural

areas and will also have an economic multiplier effect in these communities. This

should help reduce social tensions in regions not enjoying the benefits of the booming

industry sector and should also provide an opportunity to improve incomes of rural

communities. Improved management and increased investment in the mining sector

should be done together with initiatives to stimulate agricultural production based on

increased efficiencies through utilising higher levels of technical equipment.

Chinese steel mills should continue their efforts to join up with iron ore producers (for

example, Chinese mills seeking joint ventures with iron ore companies and the purchase

of the Minero Peru iron ore mine). Australian iron ore producers’ sharing infrastructure

would go a long way to improving Australia’s competitive position and help it continue

as China’s principal source of iron ore. Notwithstanding the comments made on the

need for Australian iron ore producers to share infrastructure, it is interesting to note

that Hancock Mining’s development of the Hope Downs project in Western Australia

failed in its bid to obtain access to BHP Billiton’s rail facilities. Even after an appeal to

218

the State Supreme Court, Hancock Mining still could not obtain access. So, it appears a

free for all approach is being adopted. This may return healthy margins in the short

term, but will not be in the longer term interests of Australia and its Chinese customers.

Subsequently in November 2003, the West Australian Supreme Court ruled that the

project had a right to access the BHP Billiton’s railway network, with agreement still

needing to be reached on the actual access terms with BHP Billiton (Trounson & King

2003).

Exploration and investment in mining in Australia is shrinking. Flint and Searson

(2001-2002, p.8) report that the 2001-2002 exploration expenditure in Australia was

45% lower than that of the peak year of 1996-1997 (149 million Australian dollars

compared to 636 million Australian dollars). This provides an excellent opportunity for

China to participate in exploration activity within Australia.

With the emergence of direct reduced iron process plants, which enable lower quality

iron ore to be processed (beneficiated), the nature of iron ore demand may change over

the next decade. China is likely to use this type of process to utilise its own lower iron

content reserves of iron ore. When this will occur will depend on whether the country

can secure low cost iron ore supplies in the future. These dynamics will shape future

iron ore sourcing negotiations. In order to reduce reliability on international markets

for sourcing of strategic minerals and improve the country’s probability of sustaining its

strong economic development, elevating the status of the domestic mineral resource

sector with more domestic exploration and improved beneficiation is important for

China’s future development and industrialisation. Increasing costs of iron ore and sea

freight will drive China back to using its own reserves again. This will be negative for

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the iron ore suppliers, but may be necessary to return to balanced supply and demand

characteristics.

If China does not invest in securing its future iron ore supplies, steel producers will

have less control over material price and commercial conditions. As other countries in

the region develop their steel industry, upward pressure on raw material prices will

occur. This will make it difficult for China to achieve an adequate share of steel

exports. A large share of global export market will be essential if a viable steel industry

is to be sustained after the end of this decade when China’s infrastructure development

is expected to slow down.

Reform in the financial sector

Improvement in the management and governance of China’s financial sector is

necessary. As outlined earlier, China’s high level of bad loans could threaten its

economic development as it did in Japan. China needs to reform its financial sector into

being more market driven (Kynge 2003b). This research discovered that the country’s

bad debt problems are worse than Japan’s and this is becoming a major concern to both

domestic and international investors. As shown in chart 5.14, China’s total reserves to

total debt ratios are high and have been improving since 1993. However, as was

outlined earlier, domestic bank debt within China is emerging as a major problem. A

bank debt to GDP ratio for China of 41% compared to Japan’s 15% would suggest

potential overseas investors would be wise to examine the risk of investing funds in the

country. With such a large burden of bad loans, the concern is that if depositors were to

rush and withdraw funds, the banks may not have the ability (in relation to liquidity) to

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pay out such funds. Such a scenario could occur if some negative event was to cause

depositors to quickly withdraw their funds.

At least Moody’s are preparing to upgrade China’s debt rating from stable to positive

this being due to the country’s ability to attract foreign reserves together with reducing

concerns that it can actually meet its foreign debt obligations (Areddy 2002). It is

recommended that both the Central Government and the banks continue to work

towards rapidly resolving current bad loans and hopefully, reforms will put in place

systems and processes to enable the banks to better assess the risks associated with high

capital projects.

The research found that many countries had a view that China’s international

competitive position is being maintained by its low valued currency52. This benefits the

iron and steel industry in that international demand for the country’s goods increases as

the country grows its export trade of manufactured goods. This issue will become

critical for China and its steel industry when the current period of rapid industrialisation

and reconstruction ends. At this time, China will have a large manufacturing capacity –

in particular more iron and steel capacity than the country will need and can support.

So it is very important that China manages this transition carefully to ensure that it can

maintain its competitive position. This will be difficult if its currency appreciates. 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

52 Seems the view held by majority of China’s competitors who lobby their governments.

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currency. An undervalued currency has been a key foundation in the development of

China’s economy; how long this can continue for is an issue to be watched. In the

longer term, the value of China’s currency will be a major factor in the health of the

nation’s iron and steel industry.

Notwithstanding concerns about the integrity of the financial sector, foreign companies

are still investing in China. Hijino (2001, p.24) reports many Japanese companies are

relocating their production operations to China. He cites Sony, Toshiba, Pioneer and

Mazda and reports a newspaper survey, which quotes that 69 listed Japanese companies

plan to shut or relocate 120 plants. This issue is not just unique to Japan but many other

Asian countries. This will be one of the factors, which will lower product prices;

support deflationary pressures and in particular will continue to drive China’s steel

demand up. Competition from its Korean and Vietnamese neighbours is increasing. As

Vietnam moves away from its dependence on agriculture, the country has been reported

to have the fastest economic growth in Asia in 2002 (Bloomberg News, cited in

International Herald Tribune, 3 Jan, 2003). In the past decade, while Vietnam’s

economy has doubled, China’s has quadrupled. As Vietnam develops its trade in oil

and gas production, industry and manufacturing, it has the potential to more than double

its economy in the next decade. South Korea has also been experiencing sound

economic growth. According to Chang (2003), Korea’s core traded items of clothes,

semiconductors, footwear, audio-visual equipment and shipbuilding rose 41% in 2002

compared to 38.9% in 2001. She reports that the Korean Government is hoping to

double trading volume to US$600 billion by 2010. This increased activity and fierce

competition from around Asia coupled with China’s exposure to exchange rate changes

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and capital structural problems will make investors increasingly nervous to invest in

China. For those who do invest, time will tell whether their desired returns will

materialise. McGregor and Leahy (2003) report that some investors are actually

struggling to find listed companies in China that are making adequate returns. Concern

about the financial sector even exists within China’s communist party members. The

New Paper (2002b), reports on a recent survey of 104 senior Communist Party officials

by the Central Party School which found: “That almost two-thirds said a financial crisis

is the greatest danger to China in the next 10 years”.

Structure of the industry

Foreign direct investment was found continuing to increase with no reason to suspect it

will stop unless the financial sector further deteriorates or social instability within

society arises. Such large foreign investments in manufacturing along with the

competitive resource costs have the potential to both enhance and sustain China’s

trading performance after the current industrialisation period ends. This is a positive

finding that will impact on the continued viability of the country’s iron and steel

industry.

Improved planning in relation to matching supply and demand of iron ore and bulk

carriers – major cost component inputs in producing steel was discussed above. These

are inputs that China does not have a comparative advantage in. In conjunction with

improved planning, the structure of the industry needs to also change to both match and

satisfy the global market. When China’s infrastructure construction boom ends, having

the ability to supply the steel products required in manufacturing rather than

construction will be essential.

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We have seen earlier in the discussion on technical efficiency that two key measures,

the ratio of flat rolled & tubular steel produced to total steel production and the

continuous casting to total crude steel produced ratio are important indicators of the

level of technical efficiency reached by a country’s steel industry. The research found

that China has scope for significant improvement in the production of flat rolled and

tubular steel sections. Improvements in this area will enable not only less reliance on

imported products, but will enable capture of an increasing share of the world trade in

these sections. China with such a low steel consumption per capita value of 140 kg

suggests that the country still has great potential for increased demand to occur. This

demand will be for steel products that are not the speciality of China’s steel industry.

China’s steel industry is “long” in Long products, this means they benefit from price

increases in such products. These products are currently in demand as a result of

construction consumption. The country is “short” (they do not benefit when price

increases) in rolled and thin sheet products for the manufacturing industry.

Development of the appropriate productive capacity to balance long and short product

positions at the correct time is essential to sustain a viable iron and steel industry in

China.

When domestic demand for steel stabilises and moderates, China will focus more on

increasing exports and technical efficiency. This is supported by Sugimoto (1993,

p.284), he claims “whatever the background, it has been historically proven that export

orientation in a country’s steel industry creates an opportunity to improve technology

and quality levels”. Wu (1997) emphasised the importance of efficiency, productivity

and improved technology, particularly between regions, in supporting China’s

economic growth. He concludes that to sustain growth, reforms supporting innovation

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will be needed. This will be particularly critical for steel producers, which are not

strategically located close to shipping ports.

Economic growth is a major driver for demand. Income growth, in particular, leads to

increased consumption of steel goods: automobiles, infrastructure, shipbuilding,

domestic goods etc. With China’s healthy economic development, its acceptance into

WTO and with the Beijing Olympics the potential for a continued positive impact is

high. In the short term, the negative parameters are the gloomy economic conditions

and regional instability (which in turn negatively impact world economic growth). A

minor threat to the iron and steel industry is the emergence of substitutes, like

aluminium, which has the potential to lessen demand for iron and steel. In the

manufacturing industry and to a lesser extent the construction industry, non ferrous

metals, particularly aluminium, can be substitutes for steel and therefore a threat to the

steel industry. Aluminium is significantly cheaper, is a lighter material and does not

corrode. According to Kang Yi, president of the China Nonferrous Metals Association

(cited in Delaney 2002), China’s output of aluminium may rise from the 2002 output of

2.74 million tonnes to 7.00 million tonnes a year by 2005. In 2002, China's production

of 10 major non-ferrous metals reached 10.12 million tonnes in 2002; this exceeded the

USA and now ranks China a world leader. Kang Yi further stressed, “That the non-

ferrous metal industry is strongly correlated to national economic growth, and of

China's 124 industrial sectors, 113 use non-ferrous metals in production. In 1949,

production of non-ferrous metals was only 13,300 tonnes” (CEIS 0328 2003, art.035).

This research discovered that as a result of low labour rates, China was becoming the

workshop of the world, impacting regional trade; neighbouring countries need to adjust

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their economic models to improve their competitive positions. In effect, China has been

given a head start, but neighbouring countries faced with higher unemployment and

depreciating currencies will develop and discover newfound strategies that will provide

them with comparative advantage so that they can increase their share of global trade.

It is not suggested the Chinese model using the steel industry as the Marshall of

industry is appropriate for all, but the model’s principles can be applied to lesser extents

to other drivers of economic growth. The impact on China’s iron and steel industry as

other countries develop will depend on when China’s domestic demand reduces to a

level that appropriately matches supply. This will happen when the economy reaches a

critical point in its life cycle - as was discussed in the section on intensity of demand.

By this stage, China must improve its technology and skills to improve quality of steel

and product range. Only by doing this, will the steel industry maintain product demand;

otherwise, it will suffer from unit production costs which will negatively impact

economic sustainability and in the longer term will lead to surplus capacity which will

require plant closures. China cannot rely on continuing to be the workshop of the world

for low cost labour intensive goods. China’s increasing appetite for high value capital-

intensive goods need to be satisfied internally or the country’s iron and steel industry

will suffer overcapacity and low profits as occurred in other developed countries.

It is important for sustaining the country’s trade performance, to continue reforming and

reducing trade barriers (if not eliminate them). An example of this would be the

removal of trade barriers with Taiwan. Trade barriers on direct air and shipping links

between the countries add around 60% in freight costs in trade between the two

countries and removing these barriers could add 3% to both countries’ economic growth

by 2011 (Mason, cited in Roberts & Clifford 2002, p.24). China trading as part of the

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WTO will be helpful in dealing with tough global steel industry producers. For

example, China has already used the WTO to make its opposition very clear to the USA

announcements regarding limiting steel imports and tariffs of up to 40%. China, with

the help of other WTO member countries are likely to be effective in convincing the

USA that this trade approach is not acceptable.

Sustaining China’s economic development without clean energy resources will be major

challenge for the government. The section on energy illustrated how the country’s good

fortune was achieved through using its abundant natural resource; coal, as the prime

energy source. The country is now moving towards cleaner (and imported) alternatives.

It is worth noting that the famous Taiheiyo coal mine in Kushiro, North Japan closed in

January 2002. This brought to end an industry that helped rebuild Japan’s shattered

economy (Ibison 2001). Are China’s fortunes just lagging those of Japan? Balfour

(2002, p.24) makes reference to China’s expansion following the pattern of Japan in the

1970s through 1980s and Korea in the 1990s. The results of this research suggest that

China’s economy may indeed be following a similar pattern to Japan’s. The steel

industry in Japan, industrialisation and trade performance drove its economic growth,

the positive cycle ending when its currency significantly appreciated along with poor

financial sector performance with its increasing non-performing loans.

It is therefore very important for China’s iron and steel industry structure to become

export focused and develop its capability to produce flat products and higher quality

technical steel grades more suited to manufacturing rather than construction. Increased

export focus (both on steel and manufactured products) will develop a global market

culture which in turn is more likely to ensure the longer term viability of the industry.

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Higher quality technical steels (stronger sections – strength to weight ratios) will help

defend against loss of market share in construction markets where a loss of market share

could occur due to the use of substitutes replacing steel. Increased export focus and

higher quality steels can be considered as a two direction approach to changing China’s

iron and steel industry structure.

Managing the backwash from an industrialisation boom

In the early 2000s, GDP growth has averaged 7%. Leow (2003) suggests that China

will be an economic power by 2050 having growth targets through to 2030 of 5.5% and

from 2030 to 2050 lowering to 4.5%. At the same time, GDP is expected to double by

2010 and quadruple by 2020. This research supports China’s potential for such

development, but points out the threats of social disorder resulting from reforms leading

to rapid increases in unemployment, poor performance in the financial sector due to

high level of bad debts (non-performing loans) and the value of China’s exchange rate

which will have a significant impact on the competitiveness of industrial output. Each

of these 3 major issues has considerable potential to negatively impact the stability of

China’s rapidly developing iron and steel industry. Each one of these issues in

combination with some other global event or factor53 could see China having excess

steel capacity – this becoming more critical after the industrialisation build up to the

Beijing Olympics in 2008.

The value of industrial activity and its contribution to GDP were seen to be increasing

and at the same time the agricultural contribution was decreasing.

53 For example another energy crisis.

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In 2002, the output value of the industrial sector was US$806.3 billion. This

represented 65.12 % of the 2002 gross domestic product. Looking back to 1992 and

1982 industrial activity, as percentages of GDP, were 60.50% and 53.24 % respectively

showing significant increases in this industry sector. The contribution to GDP of

China’s traditional industry, agriculture, was 14.53%, 21.77% and 33.28% for 2002,

1992 and 1982 respectively - significant decreases. This is further evidence of one

major sector booming (industrial sector) and another sector lagging (agriculture). It is

made worse when exchange rates increase in value, putting further pressure on the

lagging sector, further evidence of the phenomenon is seen if workers migrate from the

lagging sector to the booming sectors. These trends in industrial and agricultural

production could have significant impact in the country’s ability to provide adequate

and low cost sources of food in the future and will increase the need to import these

products. The Chinese government is actually encouraging a migration of between 300

to 500 million people from the rural to the urban sector by 2020 (Kynge & Dickie

2003). The migration from rural to urbanisation will put further downward pressure on

agricultural production. Streats (2003, p.31) reports that grain output has fallen from

512 million tonnes in 1998 to 457 million tonnes in 2002 with the 2003 harvest

estimated to fall further to 440 million tonnes. This is causing increases in grain prices

by as much as 50 per cent and has led to the government launching a campaign to assure

the public that the country has enough reserves. The widening disparity in income

between rural and urban households further encourages shifts in skills towards

industrialisation. The importance of proper development of the rural sector of China’s

economy needs careful management to prevent the major cities of China becoming

large slums with high levels of poverty (Patrose 2003, p.12).

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This raises the issue of a nation transforming farming and handcraft skills to industrial

productive skills as an industrialisation boom is in progress only to find that at the end

of the boom, such skills are in less demand and the traditional skills have been lost.

This becomes evident in higher unemployment and then increased social disorder both

of which were evidenced during this research and were discussed in the earlier section

on structural weaknesses in the economy.

In view of concern regarding the warming climate changes that are evident in China, the

Chinese Academy of Agricultural Sciences recommended that effective measures are

required to ensure that agriculture output is not adversely affected by climate changes.

This being particularly important to protect China’s population which should reach 1.6

billion by 2020 (cited in CEIS 2003 1126, art.001). Such a negative scenario resulting

from climate change in combination with a society that loses its farming and handcraft

skills due to an industrial sector boom has the potential to seriously impact the nation.

Other problems can occur in a society as large and diverse as China’s. According to a

Reuter’s article (cited in Straits Times, 2002), China’s growing AIDS/HIV crisis could

impact its economic development. The problem is mainly in the countryside where

80% of all China’s AIDS cases are to be found. The impact of AIDS is considered to be

a threat to many of the social gains made by China during the past several years. In

addition, China’s population is an ageing one and the one child policy has reduced the

numbers of young people. Also many of the younger Chinese are moving overseas to

study and live. So after the 2008 Olympics, at a time when infrastructure development

will most probably slow down, the trend for younger Chinese to move overseas would

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suggest that demographics may become an increasingly important determinant of iron

and steel demand.

By reviewing the historical and cultural characteristics behind China’s development, an

idea of the tough conditions experienced by the Chinese and why they have such

enthusiasm and drive to become prosperous was obtained. The “Let a Hundred Flowers

Bloom Campaign” in 1956 encouraged intellectuals to criticise the government. The

campaign was used as tool to search out and punish those people who opposed the

thought of the government. This approach has not been uncommon in Chinese history

and it is no wonder we see many Chinese people and businessmen, in particular, very

reserved and slow to speak up either about or against the system. The historical review

has shown the importance Chinese leaders have put on the iron and steel industry in

relation to it being the “Marshall of Industry”.

China’s pre reform period was plagued by structural inefficiency and dislocation of

resource input factors. Wu (1996) suggested that centrally planned economies were

closely related to developing economies in that they have a strong reliance on the

growth of factor inputs. His view on directive planning playing a positive role during

initial industrialisation periods is supported by the results that followed the planning

efforts of the earlier five-year plans. This has been a planning culture that has

continued to be successful long after the initial market reforms. The results of China’s

experience in developing the nation’s steel industry, suggests that centrally controlled

decision-making is somewhat limited in its effectiveness to improve resource allocation,

factor inputs and productive efficiency.

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The Chinese have a saying: “Bu po bu li” (building after destruction)54. We have seen

many instances following major wars, where reconstruction of a country can lead to

improved economic performance. The centrally planned reforms (for example: great

leap forward 1958-1959 and the Cultural Revolution 1966-1976) instigated by Mao

Zedong after the communists took control in 1949 provided such a foundation for

rebuilding and improvement. Deng Xiaoping’s “open door” reforms in the 1980s saw

the emergence of Special Economic Zones. These Zones had favourable trading

features that were attractive for foreign investors. Subsequent development in key

coastal provinces and cities started the country’s rapid economic development. This

research outlined the significance of continued reforms which support innovation and

have been shown to be important factors in setting up the social structure to enable

China’s economic development to continue. The nature of these reforms, like they did

in the past when they laid the foundation of China’s industrialisation and created the

environment for the iron and steel industry to flourish, are needed for sustaining both

the economy and the viability of the country’s iron and steel industry. In 2002, Jiang

Zemin told congress that market for rural land should be created, as this would help

speed up the urbanisation of rural land that in turn would lead to increasing economic

efficiency. Turning rural land into a tradeable commodity is seen as one of the boldest

steps in land reform since the communist party nationalised all land in 1949 (Kynge

2002b).

Jiang Zemin has also been calling for “expanding the middle-income” group to

quadruple the gross domestic product by 2020 (Kynge 2002c). This demonstrates that

the Central government still has the will to pursue reforms that continue to move

54 Bu po bu li was a quote from Mao Zedong to promote the need for destruction to precede construction.

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towards industrialisation. The Communist Party congress in November 2002 set the

goal of “creating a prosperous society during the first half of this century”, the aim of

this being to make China a modern industrialised economy (Brown 2003). This will

encourage demand for products and is positive for the outlook of iron and steel

products. The economic indicators outlined in this research that were behind political

reform and management achieving good economic results were also supported by

Tarchalski (1995).

The research results demonstrate the validity of the hypothesis that 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 trade. When combined with Chinese culture, this

hypothesis leads to the CHINESE MODEL for modernisation and economic

development.

The development of China’s iron and steel industry relative to that of developed

countries and regions like USA, Europe and Asia was examined and it was shown that

China’s iron and steel industry emerged to become a dominant global player and an

important contributor to modernisation and development of China’s economy. The role

of culture and central reform policies together with competitive factors in production

show why China was able to achieve growth through steel industry development at a

time when many developed economies’ steel industries were deteriorating and in effect

were becoming a burden on those economies. They also help understand the

components of the model driving China’s economic development and the relationship

between industrialisation based reforms, culture and economic development.

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Trade Outlook

The trade development section outlined the magnitude of the trade prize. The global

market place is very competitive. Dealing with China will not be easy. Trench’s (2001,

p.13) concluding comment in the paper presented at the 2001 Global Iron and Steel

Conference: “It is more likely to be wiser men from the east rather than wise men from

the west that will get prizes”, is supported by Kencihi Ohmae’s (cited in Hijino 2001,

p.24) view on market competitiveness:

Competition is not a fight between China and

the US or Japan, but a race in each market in

which the victor will be the company that

internalises China’s competitiveness.

Words of Warning:

According to the Economist Intelligence Unit (2001, para.1) in its April 2001 study of

the quality or attractiveness of the business environment in the 60 major economies

during 2001-2005, China’s market was ranked at 43 and being of: “Far greater promise

than delivery, and would remain so for some years”. This research can relate to Rudd’s

(cited in James, 2002, p.54) 3 rules for doing business in China: “Beware, Beware,

Beware”

With WTO and the 2008 Olympics, the race is on. It may well be more likely Asian

business rather than Western businesses that will get the larger benefit of China’s

increasing trade opportunities. This may be due not only to a lack of experience in

trading with the middle kingdom, but also a lack of understanding of its people, culture

and history. In addition to supporting using China as a manufacturing base, in his

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review on a China trade book, John Derbyshire’s (2002) gives the following advice:

“keep a suitcase packed and ready under your bed at all times”.

In addition to outlining the development of China’s economy, this research has brought

together an appraisal of the Chinese Steel industry and its role in supporting objectives

in industrialisation. This should be helpful in understanding its history and its future.

The work provides an insight into the Chinese model and the results should be

particularly useful for Australian mineral resource companies wishing to sustain growth

in market share of their raw materials which will be increasingly required by China as

its steel industry continues to develop along with its economy.

The Chinese government has demonstrated an ability to manage China’s economy well,

even when faced with many pessimistic external factors. The economy has the potential

to continue to develop beyond analysts’ expectations. This development could be at the

expense of neighbouring Asian economies.

Australia’s contribution to China’s economic development through its role as a major

supplier of iron ore has been shown to be substantial. The trade relationship has been

symbiotic in that both countries have benefited. This mutual benefit should continue as

long as China retains its dominant position as the world’s largest steel producer. The

symbiotic trade relationship can increase and have a greater chance of being sustained if

both countries increase trade. With Australia having a comparative sea freight

advantage, this bilateral trade between China and Australia has the potential to increase,

eg, liquid natural gas and other mineral resources. The extent of this increase will

depend on China sustaining its current economic growth. China’s imports of mineral

resources will continue to be highly dependent on the condition of its economy.

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China chose to increase both the wealth and its security of its nation through

industrialisation. This involved large expenditure in infrastructure to support logistics

associated with trade in manufactured goods. To industrialise and develop, large

amounts of steel were required. Importing this would have been prohibitively

expensive. If a country has the resources: low cost energy supply (China used coal),

coking coal (carbon from which is used in steel making process), iron ore and labour,

then it is viable to supply your own needs and at the same time usefully employ your

people. China did exactly this. Government support is also essential and it seems that

in the Chinese model, trade protection has been helpful in getting industries started.

As it continues to partially satisfy its own demand for steel, it has not yet become a

major exporter of steel. This phase still needs to come - earlier better before its

currency increases in value. Industrialisation through a strong steel industry has

enabled the country to develop its manufacturing sector and while this has been

occurring, well managed reforms were put in place by successive central governments.

The steel industry is the foundation of a nation’s industrial sector which in the case of

China was shown in Chart 5.9 to have grown from US$155.6 billion in 1981 to

US$806.3 billion in 2002 (56% to 65.2% of GDP respectively) being the largest

contributing sector to the country’s economy.

Replicating the Chinese model in other countries is possible as long as the basic factor

inputs are available. China and Japan built their industries using coal as the primary

energy source. From an environmental view, this has become more difficult and

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availability of a cleaner fuel like gas would be a better alternative. This will also be

more expensive. Developments in downstream processing may give developing

countries an opportunity to source high quality feedstock into which considerable

energy has already been input. As sea-freight costs increase, it becomes more

economical to carry feedstock of 98% iron rather than only around 63% (the remainder

being waste). In replicating the Chinese model, it is important not to focus entirely on

the steel industry, but on the principles behind the model: comparative advantage being

a key driver of economic development, government control in planning that facilitates

the reforms needed to build industry to prepare for global trade and a culture that

embraces development and change. China’s strong leadership with policies not always

liked has been a good example of what is needed in times of crisis.

During a large period of China’s economic development, key industries like the steel

industry were protected from international competition. China took full advantage of

this during a time when the western world was rather pre-occupied with issues like the

“cold war” with the USSR. Now, governments which try to protect their industries

tend to be heavily criticised by other countries. Trade groups like the WTO have

become powerful in applying pressure on such countries. It is interesting to note that

the virtues of free trade are expounded by western countries, yet at the same time, major

trading economies like the USA have been imposing tariffs and measures to protect

their steel industry. Their argument being that the industry needed protection before it

was destroyed! This appears to support the view that a measure of protection for an

industry is important tool to manage the development of that industry. The US

government is fully aware of the important role that its steel industry plays in its

economy and like China did in the past, has needed to protect it. In the longer term,

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when China’s currency has likely increased in value and its industry suffers from

overcapacity, such an approach may also be needed by China.

In addition to China, the research findings extend to Australia and other countries that

could benefit from a better understanding of the factors behind the Chinese model. A

summary of these findings together with recommendations, suggestions for further

research and conclusion are presented in the following chapter.

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7 Recommendation and Conclusion

In examining the role played by China’s iron and steel industry in the economic

development of the country, wide subject areas were researched. This included Chinese

history and culture which gave an understanding of the importance of it being a key

component of successive five year plans to industrialise and modernise the country. To

enable one to better quantify the development and structure of the industry,

comparisons were made to the global iron and steel industry. Since the start of the

People’s Republic in 1949, many reforms have been put in place. The country has

become a leading economy in the world. Unlike during its developing years, when it

maintained a degree of invisibility and did not draw much attention from the media,

China’s policies are now monitored daily by all sectors of the international media. With

removal of protective trade barriers and the country under pressure from developed

countries to attend to its trade surpluses, maintaining previous economic performance

will be a big challenge. Whether the industry can maintain its role and sustain the

growth in the country’s economy was considered in detail and this lead to examining

the contribution that Australia, as a supplier of the key input material iron ore has and

will play.

From such a wide and complex subject area, in order to simplify the key findings, they

have been collected and summarised in the 4 sections of this chapter. The first section

summarises the key findings. The second section lists recommendations for China,

Australia and those countries that may find aspects of the Chinese Model useful as a

framework for managing or improving their economy. The third section provides some

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suggestions for further research directions and conclusions are presented in the final

section.

7.1 Summary of findings

The key research findings have been summarised and grouped into 5 areas, namely:

demand-planning, security of supply of iron ore, reform in the financial sector, structure

of the industry and managing the backwash from a booming industrial sector. Each

item below refers to China.

1. Demand-planning

The architects of the country’s five year plans need to devise and articulate a

planning strategy that has less emphasis on general infrastructure development

and more on balancing raw material supply and demand to match necessary, cost

effective construction. Excluding flow on cost effects, an estimate of costs

incurred as a result of supply balance mismatches exceed US$5 billion per year

There is a need to better organise and consolidate iron ore sourcing process. In a

concentrated supply market structure, better to make fewer purchases of large

quantities in order to achieve the most favourable commercial arrangements

The country’s increasing appetite for high value, capital goods needs to be

satisfied internally or the country’s iron and steel industry will suffer

overcapacity and low profits.

2. Security of supply of iron ore

There is a critical need to put in place appropriate strategies to ensure long term

security of supply of high quality iron ore

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It is necessary to improve management and increase investment in the mineral

resource sector. This could include iron ore exploration and investment in

Western Australia

Increased contingency planning such as long term supply contracts, joint

ventures and equity in producer operations is required

In the longer term, steel producers should make better use of beneficiation to

improve opportunities to further utilise the country’s lower iron content iron ore

reserves. Planning for this should commence at once.

3. Structure of the industry

Steel producers cannot continue to rely on maintaining a comparative advantage

through low cost labour. This reliance needs to transfer to low unit cost

manufacturing resulting from high tech plant and factory facilities

Steel producers should work with and encourage their principal iron ore

suppliers to share infrastructure and drive material costs down. This could be

part of supply alliance strategies

Should be less focus on fuelling the booming industrial sector and more focus on

initiatives to stimulate agricultural production. This is best done by increasing

efficiencies through utilising higher levels of technical equipment and learning

from the industrial sector

Working towards capturing a large share of the global export market is essential

if a viable steel industry is to be sustained beyond 2008. The value of China’s

currency will be an important aspect impacting the level of success achieved

Industry structure needs to change to both match and satisfy the global market.

China’s steel industry is biased towards long products which are currently in

demand as a result of high construction levels. When the infrastructure

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construction boom ends, being able to supply high quality flat, rolled and thin

sheet steel products required for manufacturing rather than construction will be

essential.

4. Reform in the financial sector

China’s bank debt to GDP ratio being 41% compared to Japan’s 15%, indicates

further improvement in the management and governance of China’s financial

sector is necessary

An undervalued currency was found to be a key element in the development of

China’s economy - This will only benefit the iron and steel industry if it does

not appreciate in value enabling it to sustain international demand for the

country’s manufactured goods.

5. Managing the backwash from an industrialisation boom

Sustaining China’s economic development without clean energy resources will

be major challenge for the central government. The results of this research

suggest that China’s economy may indeed be following a similar pattern to

Japan’s

The potential for increasing social disorder resulting from reforms which cause

higher unemployment exists

The value of industrial activity and its contribution to GDP were found to be

increasing at the same time the agricultural contribution was decreasing. This is

evidence of a booming industrial sector and a lagging agricultural sector. These

trends in industrial and agricultural production have the potential to seriously

impact the country’s ability to provide low cost sources of food in the future,

leading to an increasing need to import such items

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Excessive migration from the rural to the urban sector will result in further

downward pressure on agricultural output

The widening disparity in income between rural and urban households will lead

to transforming farming and handcraft skills to industrial productive skills only

to find that at the end of an industrial boom, such skills are in less demand and

the traditional skills have been lost.

7.2 Recommendations

This research project’s main focus was on China and the role played by its steel

industry in developing its economy. At the same time, Australia’s contribution as a

principal supplier of iron ore is examined. As a result, this section lists

recommendations for China, Australia and also those countries that could benefit by

taking advantage of the Chinese model.

7.2.1 China

The iron and steel industry played an important role in facilitating China’s

transformation from an agricultural to an industrial society. However after 2008, it is

likely that manufacturing sector will become the major driver of China’s economy.

Therefore in order to sustain economic development and further improve standards of

living, careful attention to the five key findings listed above is required.

As China industrialises and increases its manufacturing capability, it is important not to

lose sight of the need to maintain a sound agricultural sector. This sector has not been

developing in proportion to the needs of the nation and the development of the

industrial sector. It is recommended that the agricultural sector is developed in a

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manner that increases productive efficiency by becoming more high tech and that it is

fully supported by an advanced domestic manufacturing sector.

7.2.2 Australia

Australia’s contribution to China’s economic development through its role as a major

supplier of iron ore has been shown to be substantial. The trade relationship was found

to be symbiotic in that both countries have mutually benefited. Bilateral trade between

China and Australia has the potential to increase, eg, liquid natural gas and other

mineral resources. The extent of this increase will depend on China sustaining its

current economic growth. China’s imports of mineral resources will continue to be

highly dependent on the condition of its economy and the economy will be impacted by

the price of these resources.

This research identified that due to capacity constraints, Australian iron ore producers

cannot keep up with China’s increasing demand and as a result are investing heavily in

capacity upgrading. This upgrading is expensive and after completion, producers will

be exposed to the possibility of China unexpectedly cutting back demand. This would

create excess supply which in turn would drive prices lower. Contingencies need to be

put in place for this scenario. An example of such a contingency is negotiating tonnage

commitments within longer term contracts with the Chinese steel mills. Australian

producers need to make a positive effort to demonstrate to China that they should be the

suppliers of choice for them in the long term.

As a result of higher returns being achieved elsewhere and land rights issues, a trend

away from exploration and investment in the Australian mining industry was identified.

This puts the longer term viability of the iron ore industry at risk. This is of concern to

244

China’s longer term security of supply and arrangements should be negotiated with the

Western Australian government with a view to securing attractive terms in relation to

mineral title rights in the state. This needs to be seen as an opportunity for China to

invest in iron ore exploration and subsequently production.

7.2.3 Other Countries

In order to industrialise and develop, it is important countries understand their

competitive advantage and as was achieved through the Chinese model, use this as a

key component of a planning strategy to improve their economic wellbeing. In

replicating the Chinese system, occasionally referred to as being a social market

economy with Chinese characteristics (Wolf 2002, p.48), it is important not to just focus

on the steel industry, but on the principles behind the model: comparative advantage

being a key driver of economic development and government control in planning that

supported the necessary reforms to create the correct climate for change.

7.3 Further Research

The following further research directions are suggested:

• A better knowledge of Chinese history would have helped western companies to be

better prepared for taking full advantage of China’s industrialisation progress. In

particular, this research found that very little historical documentation in relation to

the significance of each of the five-year plans had been carried out. More insight

into this planning approach would be useful for not only managing a nation, but

managing an enterprise

245

• Further analysis should be carried out to determine the cost/benefits associated with

China’s excessive demand of iron ore resulting from an ambitious infrastructure

construction programme compared to a more modest programme that puts

downward pressure on iron ore and sea freight price

• Extensive steel industry and economic data have been collected and is available in

a data base. This should be updated and maintained

• Further research is needed to enable Chinese planners to predict optimum

production capacities for long and flat products which are necessary to sustain the

country’s iron and steel industry

• An econometric model relating agriculture sector output with industrial sector

output using economic and demographic variables should be developed. This

would be useful in assisting with better rural and urban planning.

The above list of further research topics is not exhaustive.

7.4 Conclusion

The development of China’s iron and steel industry relative to that of developed

countries and regions like USA, Europe and Asia was examined and it was shown that

China’s iron and steel industry had emerged to become a dominant global industry

leader. China’s industrial sector was shown to be the largest contributing sector to the

country’s economy growing from US$155.6 billion in 1981 to US$806.3 billion in 2002

(56% to 65.2% of GDP respectively) and the steel industry has been a key component

of the industrial sector. The research results demonstrate the validity of the hypothesis

that from a long-standing national development perspective, a firmly based indigenous

steel industry not relying on imported steel provided a sound base for modernisation

and economic development through industrialisation and trade. When combined with

246

Chinese culture and history, this hypothesis leads to the Chinese model for

modernisation and economic development.

The historical review has shown the importance Chinese leaders have put on the iron

and steel industry in relation to it being the “Marshall of Industry”. China’s experience

in developing the nation’s steel industry, suggested that centrally controlled decision-

making was limited in its effectiveness to improve resource allocation, factor inputs and

productive efficiency. Mao Zedong’s “Bu po bu li” (building after destruction) was

shown through the centrally planned reforms of the Great Leap Forward (1958-1959)

and the Cultural Revolution (1966-1976) to have provided a foundation for economic

reconstruction. This was to be further consolidated by Deng Xiaoping’s “open door”

trade reforms during the 1980s.

China got to where it is today mainly through the efforts of its own people. Future

generations need to manage the improved conditions that have been created for them by

their ancestors. This will be their responsibility as Chinese. Older Chinese believe that

wealth can only last 3 generations, so many challenges lie ahead.

Over many years studying China, I have increasingly observed Chinese thought shifting

to western ways. In the early 1970s, while studying martial arts under Sensei Harada an

ex professor of Japan’s Waseda University, I recall asking him how Japan would

develop in the years ahead. I never forget his reply which was along the lines the rapid

development seen in the 1970’s would only last for a generation, this being due to

Japanese youth changing their culture and habits to western ways.

247

Notwithstanding the never ending list of advice being offered to China by western

consultants, I conclude this thesis with my own contribution to the people of China:

Maintain your culture, the rest will follow.

248

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9 Appendices

9.1 Global Iron & Steel Industry Data

9.1.1 China Steel Balance

276

9.1.2 Japan Steel Balance

277

9.1.3 Global Steel Production, 1900-2002

YearProduction

million tonnes

YearProduction

million tonnes

YearProduction

million tonnes

1900 28.3 1935 99.5 1970 595.41901 31.0 1936 124.3 1971 582.61902 34.5 1937 135.7 1972 630.71903 36.1 1938 110.0 1973 697.51904 36.3 1939 137.1 1974 703.81905 44.9 1940 140.6 1975 643.01906 51.2 1941 153.8 1976 675.51907 53.0 1942 151.4 1977 675.61908 41.4 1943 159.6 1978 717.21909 54.2 1944 151.2 1979 746.41910 60.3 1945 113.1 1980 716.01911 60.5 1946 111.6 1981 706.91912 72.8 1947 136.0 1982 644.81913 76.4 1948 155.3 1983 663.41914 60.4 1949 160.0 1984 710.61915 66.6 1950 191.6 1985 718.81916 78.2 1951 211.1 1986 713.41917 82.0 1952 211.6 1987 735.91918 77.2 1953 234.8 1988 779.61919 58.5 1954 223.8 1989 786.01920 72.5 1955 270.0 1990 770.51921 45.2 1956 283.5 1991 733.61922 68.8 1957 292.5 1992 719.71923 78.3 1958 274.3 1993 727.51924 78.5 1959 305.7 1994 725.11925 90.4 1960 346.4 1995 752.31926 93.4 1961 351.3 1996 750.01927 101.8 1962 360.1 1997 798.91928 110.0 1963 387.1 1998 777.21929 120.8 1964 433.4 1999 788.31930 95.1 1965 454.0 2000 847.61931 69.6 1966 472.7 2001 849.61932 50.7 1967 497.2 2002 897.01933 68.0 1968 529.81934 82.4 1969 574.6

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%

Year

World Production

(million tonnes)

China Production

(million tonnes)

China as % of World

Production

2002 897 181.6 20%2003 912.2 193.7 21%2004 927.8 206.7 22%2005 943.5 220.5 23%2006 959.6 235.3 25%2007 975.9 251.1 26%2008 992.5 267.9 27%2009 1009.3 285.9 28%2010 1026.5 305.0 30%

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

Apparent Consumption of Crude Steel per Capita

Kilograms crude steel1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

European Union 15 385.0 383.4 357.1 347.3 300.1 350.3 392.0 338.8 382.7 417.7 406.6 429.2 409.4 Other Europe 331.9 251.9 172.5 153.5 165.9 150.4 190.9 178.7 190.5 206.3 181.1 200.8 178.4 Former USSR 563.1 528.8 454.8 364.0 244.5 125.0 122.3 115.4 108.2 96.6 102.1 133.9 134.5 North America 307.5 304.2 266.9 285.3 298.1 337.8 312.0 326.0 345.7 379.5 363.1 379.0 321.7 South America 80.2 65.2 69.7 73.3 78.7 81.4 89.5 92.4 103.6 95.3 82.4 94.1 95.2 Africa 29.1 28.4 27.4 25.3 24.4 25.6 24.6 20.4 23.3 32.6 31.7 29.9 35.3 Middle East 89.5 88.4 89.8 103.3 108.5 100.2 88.5 101.1 109.6 130.8 127.6 136.3 148.4 Asia 86.5 89.7 91.3 89.8 107.4 103.2 102.0 104.7 106.2 95.7 106.2 114.6 100.7 Oceania 373.2 303.1 280.9 273.3 305.7 334.4 330.1 321.2 332.5 323.6 320.1 322.2 344.2 World 156.8 151.1 140.0 133.1 135.0 132.3 133.2 131.3 137.5 141.2 143.4 153.8 139.7

PR China 62.4 59.1 60.0 72.6 111.2 100.0 82.2 91.2 92.2 105.0 119.5 128.0 152.8 USA 412.3 412.4 354.7 381.2 404.3 450.6 427.8 448.1 461.3 498.1 467.4 482.8 401.3 Japan 757.9 802.0 800.1 676.0 646.4 634.9 673.7 664.8 684.5 563.1 557.7 635.0 589.0 Russia 398.2 268.3 142.2 148.2 134.8 136.8 123.3 142.9 196.3 215.2 Germany 560.7 562.2 488.5 480.0 386.8 467.9 498.1 417.2 464.5 486.4 468.2 505.1 478.6 Korea 430.3 501.0 602.1 531.2 604.4 721.0 827.3 864.8 867.6 560.4 756.8 846.0 Australia 406.3 323 306.3 292.8 326.1 354.7 346.6 333.8 357.9 349.5 340.7 336.5 360.8

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

Productivity of top Crude Steel Producers

1975 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002Total Steel Production (thousand tonnes)

PR China 66,349 71,000 80,395 89,539 92,613 95,360 101,237 108,911 114,588 123,954 127,236 148,900 181,552 USA 89,726 79,738 84,322 88,793 91,244 95,191 95,535 98,486 97,653 97,427 101,824 90,100 92,378 Japan 110,339 109,649 98,132 99,623 98,295 101,640 98,801 104,545 93,548 94,192 106,444 102,900 107,748 Russia 67,029 58,346 48,812 51,589 49,253 48,502 43,822 51,510 59,098 59,000 58,567 Germany 38,434 42,169 39,711 37,625 40,837 42,051 39,793 45,007 44,046 42,062 46,376 44,800 45,004 Korea 23,125 26,001 28,055 33,026 33,745 36,772 38,903 42,554 39,896 41,042 43,107 43,900 45,390

PR China 2,059 1,993 2,298 1,831 1,748 1,640 1,849 1,795USA 457 204 171 167 163 160 153 151 140 124Japan 447 305 252 240 230 221 208 197 186 176RussiaGermany 213 125 93 86 82 80 78 77 76 74Korea n/a 67 66 68 67 67 67 66 63 58 58 57 57 57

PR China 46 51 47 63 71 78 81 101USA 0 440 557 572 604 610 637 674 644 745Japan 0 362 403 412 455 423 453 540 553 612RussiaGermany 0 307 452 463 549 551 539 602 589 608Korea N/A 346 391 415 497 502 548 585 670 683 708 756 770 796

Number of Employees (thousand)

Productivity (tonnes per employee)

287

9.1.13 Ranking of Steel Producing Countries, 1993-2002 The major steel-producing countries, 1993 to 2002 units in Million tonnes

Table shows countries producing more than two million tonnes of crude steel/ year

Rank Country 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993

1 Mainland China 181.6 150.9 127.2 124 114.6 108.9 101.2 95.4 92.6 89.5

2 Japan 107.7 102.9 106.4 97.4 93.5 104.5 98.8 101.6 98.3 99.6

3 United States 92.2 90.1 101.5 94.2 97.7 98.5 95.5 95.2 91.2 88.8

4 Russia 59.8 59.0 59.1 51.5 43.8 48.5 49.3 51.6 48.8 58.3

5 F.R. Germany 45.0 44.8 46.4 42.1 44 45 39.8 42.1 40.8 37.6

6 R.o.Korea 45.4 43.9 43.1 41 39.9 42.6 38.9 36.8 33.7 33

7 Ukraine 33.4 33.1 31.4 27.5 24.4 25.6 22.3 22.3 24.1 32.6

8 Brazil 29.6 26.7 27.9 25 25.8 26.2 25.2 25.1 25.7 25.2

9 India 28.8 27.3 26.9 24.3 23.5 24.4 23.8 22 19.3 18.2

10 Italy 26.1 26.5 26.7 24.7 25.7 25.8 23.9 27.8 26.2 25.7

11 France 20.3 19.3 21 20.2 20.1 19.8 17.6 18.1 18 17.1

12 Taiwan 18.2 17.3 16.7 15.4 16.9 16 12.4 11.6 11.6 12

13 Turkey 16.5 15.0 14.3 14.3 14.1 14.5 13.6 13.2 12.6 11.5

14 Spain 16.4 16.5 15.8 14.9 14.8 13.7 12.2 13.8 13.4 13

15 Canada 16.0 15.3 16.6 16.2 15.9 15.6 14.7 14.4 13.9 14.4

16 Mexico 14.1 13.3 15.7 15.3 14.2 14.2 13.2 12.1 10.3 9.2

17 United Kingdom 11.7 13.5 15.2 16.3 17.3 18.5 18 17.6 17.3 16.6

18 Belgium 11.3 10.8 11.6 10.9 11.4 10.7 10.8 11.6 11.3 10.2

19 South Africa 9.1 8.8 8.4 7.9 7.5 8.3 8 8.7 8.5 8.7

20 Poland 8.4 8.8 10.5 8.8 9.9 11.6 10.4 11.9 11.1 9.9

21 Australia 7.5 7.0 8.5 8.2 8.9 8.8 8.4 8.5 8.4 7.9

22 Iran 7.3 6.9 6.6 6.1 5.6 6.3 5.4 4.7 4.5 3.7

23 Czech Republic 6.5 6.3 6.2 5.6 6.5 6.8 6.5 7.2 7.1 6.8

24 Austria 6.2 5.9 5.7 5.2 5.3 5.2 4.4 5 4.4 4.1

25 Netherlands 6.1 6.0 5.7 6.1 6.4 6.6 6.3 6.4 6.2 6

26 Sweden 5.8 5.5 5.2 5.1 5.2 5.1 4.9 5 5 4.6

27 Romania 5.5 4.9 4.8 4.4 6.4 6.7 6.1 6.6 5.8 5.4

Rank Country 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993

288

28 Kazakhstan 4.8 4.7 4.8 4.1 3.1 3.9 3.2 3 3 4.3

29 Argentina 4.4 4.1 4.5 3.8 4.2 4.2 4.1 3.6 3.3 2.9

30 Egypt 4.3 3.8 2.8 2.6 2.9 2.7 2.6 2.6 2.6 2.8

31 Slovak Republic 4.3 4.0 3.7 3.6 3.4 3.8 3.6 4 3.9 3.9

32 Venezuela 4.2 3.8 3.8 3.2 3.7 4 4 3.6 3.5 3.4

33 Malaysia 4.1e 4.1e 3.7 2.3 1.9 2.9 3.2 2.5 2.1 1.8

34 Finland 4.0 3.9 4.1 4 4 3.7 3.3 3.2 3.4 3.3

35 Saudi Arabia 3.6 3.4 3 2.6 2.4 2.5 2.7 2.5 2.4 2.3

36 Indonesia 2.8 2.8 3.4 2.9 2.7 3.8 4.1 4.1 3.2 3.8

37 Luxembourg 2.7 2.7 2.6 2.6 2.5 2.6 2.5 2.6 3.1 3.3

38 Thailand 2.3 2.1 - - - - - - - -

39 Hungry 2.1 2.0 - - - - - - - -

World 902.2 850.3 847.2 788.2 775.9 798.8 750 752.3 725.1 727.5

Data sources: From 1993 - 2000 IISI websitehttp://www.worldsteel.org/ix.php, viewed March

2002. For 2001 and 2002 data, IISI World Steel In Figures 2003, from IISI website, 22 Aug 2003

Malaysia 1993-2000 data, IISI Steel Statistical Yearbook, 2002, p.12

289

9.1.14 Top 50 Steel Producing Companies, 1999-2002 Data source: International Iron and Steel Institute

2002 2001 2000 1999

Steel Producer RankingMillion

TonnesRanking

Million

TonnesRanking

Million

Tonnes Ranking

Million

Tonnes

1 Arcelor 1 44 1 43.2 - - - -

2 LNM Group 2 34.8 4 19.2 - - - -

3 Nippon Steel 3 29.8 3 26.2 1 28.4 2 25.2

4 POSCO 4 28.1 2 27.8 2 27.7 1 26.5

5 Shanghai Baosteel 5 19.5 5 19.1 8 17.7 7 16.7

6 Corus 6 16.8 6 18.1 6 20 5 21.3

7 Thyssen Krupp 7 16.4 7 16.2 7 17.7 8 16.1

8 NKK 8 15.2 9 14.8 9 16 10 12.8

9 Riva 9 15 8 15 10 15.6 9 14.1

10 US Steel 10 14.4 11 12.8 14 10.7 11 11.3

11 Kawasaki 11 13.7 10 13.3 11 13 12 11.1

12 Nucor 12 12.4 13 11.2 16 10 14 9.4

13 Sumitomo 13 11.8 12 11.7 12 11.6 15 9.4

14 Gerdau 14 11.5 22 7.2 25 7.1 25 6.6

15 SAIL 15 11.4 14 10.8 13 10.9 13 10.2

16 Magnitogorsk 16 11.0 15 10.3 15 10 18 8.9

17 China Steel 17 10.5 16 10.3 17 10 16 9.3

18 Anshan 18 10.1 17 8.8 20 8.8 21 8.5

19 Severstal 19 9.6 19 8.1 18 9.6 17 9

20 Novolipetsk 20 8.6 21 7.9 21 8.2 23 7.5

21 Shougang 21 8.2 18 8.2 22 8 24 7.3

22 Bethlehem Steel 22 8.1 20 8 19 9.1 20 8.5

23 Wuhan 23 7.6 23 7.1 26 6.7 26 6.2

24 NISCO 24 7.3 24 6.9 27 6.6 27 6.1

25 INI Steel 25 7.3 27 6.6

290

2002 2001 2000 1999

Steel Producer RankingMillion

TonnesRanking

Million

TonnesRanking

Million

Tonnes Ranking

Million

Tonnes

26 Krivorozstal 26 6.9 25 6.9 29 6.1 32 5.3

27 Kobe Steel 27 6.6 26 6.7 28 6.4 28 5.7

28 BHP Steel 28 6.4 28 6.0 23 7.5 19 8.5

29 Benxi 29 6.2 38 4.9 49 4.2 58 3.3

30 Mariupol (Ilyich) 30 6.1 31 5.8 33 5.5 35 4.8

31 Polskie Huty Stali 31 5.9 30 5.8

32 Voest-Alpine 32 5.8 34 5.3 36 5.2 37 4.7

33 Zapsib 33 5.7 32 5.6 35 5.3 38 4.7

34 Maanshan 34 5.4 40 4.8 53 3.7

35 Nizhny Tagil 35 5.3 35 5.2 39 4.9 43 4

36 AK Steel 36 5.3 36 5.2 31 5.8 30 5.6

37 National Steel 37 5.2 33 5.4 32 5.6 29 5.7

38 Salzgitter 38 5.1 37 5.1 37 5.1 33 5

39 CSN 39 5.1 50 4.0 41 4.8 34 4.9

40 Tangshan 40 5.1 52 3.9 63 3.2

41 Panzhihua 41 5.0 58 3.6 57 3.6

42 Hualing 42 4.9 49 4.1 70 2.9

43 CST 43 4.9 39 4.8 42 4.8 40 4.4

44 Baotou 44 4.8 46 4.2 51 3.9

45 Azovstal 45 4.7 41 4.7 47 4.3 49 3.6

46 Stelco 46 4.7 45 4.5 38 5.1 36 4.7

47 USIMINAS 47 4.6 42 4.6 44 4.4 66 3

48 Erdemir Group 48 4.6 43 4.5 84 2.4

49 Handan 49 4.5 61 3.4 65 3.2

50 Techint 50 4.5 44 4.5 43 4.6 45 3.8

291

9.2 China and Global Iron Ore Data

9.2.1 World and China’s Historical Iron Ore Production

Historical Production of Iron ore for China and the World, 1948-2002

YearChina (1,000

tonnes)

World (1,000

tonnes)Year

China (1,000

tonnes)

World (1,000

tonnes)Year

China (1,000

tonnes)

World (1,000

tonnes)1948 245.9 181,660.8 1968 37,998.4 685,231.0 1988 154,371.0 967,162.91949 499.9 205,130.4 1969 40,030.4 723,804.5 1989 171,840.1 1,013,324.91950 2,000.5 250,444.0 1970 43,688.0 769,125.2 1990 168,290.2 982,944.41951 3,000.2 294,030.4 1971 54,864.0 787,071.8 1991 176,059.6 955,563.21952 4,368.8 297,281.6 1972 59,944.0 778,408.4 1992 197,588.6 924,834.31953 5,689.6 338,088.2 1973 55,880.0 845,660.5 1993 234,646.2 953,043.61954 7,315.2 305,747.9 1974 59,996.8 897,005.1 1994 240,186.5 969,379.81955 7,010.4 369,231.7 1975 64,996.6 901,967.2 1995 249,335.5 1,034,787.91956 9,042.4 394,493.5 1976 60,045.6 899,259.6 1996 252,283.0 1,033,501.01957 15,036.8 429,439.8 1977 49,987.2 841,061.1 1997 268,622.8 1,063,904.01958 29,972.0 405,076.2 1978 70,002.4 847,236.3 1998 222,236.0 1,004,884.01959 45,008.8 438,261.8 1979 74,980.8 904,227.8 1999 237,230.0 1,016,080.01960 54,965.6 520,526.3 1980 74,980.8 895,827.5 2000 223,950.0 1,074,023.01961 34,950.4 502,517.7 1981 66,040.0 858,119.7 2001 217,015.0 889,969.01962 29,972.0 507,705.4 1982 69,088.0 780,863.1 2002 231,430.0 1,097,000.01963 34,950.4 523,377.2 1983 71,120.0 739,899.01964 36,982.4 582,624.2 1984 74,996.0 829,301.91965 39,014.4 620,966.0 1985 79,995.8 860,507.31966 40,030.4 635,811.8 1986 99,994.7 865,927.71967 27,940.0 622,625.1 1987 112,993.4 902,685.5

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

YearWestern Australia

(million tonnes

Rest of Australia (million tonnes)

Total (million tonnes) Year Western Australia

(million tonnes

Rest of Australia

(million tonnes)

Total (million tonnes)

1950 0.02 2.40 2.42 1977 83.52 12.41 95.921951 0.04 2.46 2.49 1978 82.50 10.64 93.131952 0.23 2.75 2.97 1979 85.17 6.55 91.721953 0.72 2.64 3.36 1980 84.97 10.56 95.531954 0.66 2.93 3.59 1981 75.30 9.36 84.661955 0.54 3.11 3.64 1982 78.18 9.51 87.691956 0.34 3.66 4.00 1983 74.98 6.05 81.041957 0.42 3.46 3.88 1984 90.91 4.14 95.051958 0.58 3.42 4.00 1985 88.77 8.71 97.481959 0.74 3.49 4.23 1986 81.29 1.27 82.561960 0.94 3.51 4.45 1987 89.12 1.26 90.381961 1.38 4.08 5.46 1988 98.32 1.61 99.931962 1.45 3.59 5.05 1989 106.00 4.50 110.501963 1.35 4.33 5.69 1990 105.00 6.35 111.351964 1.38 4.46 5.84 1991 113.69 3.45 117.131965 2.28 4.53 6.80 1992 108.00 3.94 111.941966 4.23 6.83 11.07 1993 116.00 4.15 120.151967 10.14 7.02 17.16 1994 124.17 4.23 128.401968 23.25 3.37 26.62 1995 135.97 6.97 142.941969 25.08 13.50 38.58 1996 133.65 4.23 137.881970 43.19 8.00 51.19 1997 151.72 6.05 157.771971 52.03 10.04 62.06 1998 143.75 9.49 153.241972 56.12 8.28 64.40 1999 143.01 6.96 149.971973 75.90 8.93 84.83 2000 158.87 9.07 167.941974 87.00 9.95 96.95 2001 166.01 15.54 181.551975 85.19 12.46 97.65 2002 171.76 10.94 182.701976 85.57 7.68 93.26

Sources: 2000 -2001, 2001-2002 Statistics Digest - Department of Mineral and Petroluem Resources

Western Australia Government Publication

293

9.2.3 Australian Exports of Iron Ore, 2000-2002

Value (A$)

Percent. of Total

Value (A$)

Percent. of Total

Value (A$)

Percent. of Total

China 1,150,982,812 24.4% 1,348,967,319 26.8% 1,349,033,572 27.7%Japan 1,934,796,821 41.1% 2,139,161,337 42.5% 2,089,908,402 42.9%South Korea 625,596,362 13.3% 770,929,965 15.3% 725,532,842 14.9%Taiwan 345,654,149 7.3% 371,287,593 7.4% 346,370,325 7.1%Europe 395,561,843 8.4% 346,480,365 6.9% 325,687,692 6.7%Other 256,740,245 5.5% 59,543,242 1.2% 35,927,610 0.7%TOTAL 4,709,332,232 100.0% 5,036,369,821 100.0% 4,872,460,442 100.0%

Iron Ore 2000 Iron Ore 2001 Iron Ore 2002

Source: Department of Industry and Resources (Western Australia)

294

9.2.4 China Iron Ore Imports and GDP, 1981-2002

Year Iron Ore Import (million Tonnes)

GDP (billion Yuan)

1981 3.34 486.201982 3.45 529.501983 4.38 593.501984 5.97 717.101985 10.11 896.401986 12.00 1,020.201987 12.10 1,196.301988 10.76 1,492.801989 12.41 1,690.901990 14.19 1,854.801991 19.03 2,161.801992 25.17 2,663.801993 33.02 3,463.401994 37.34 4,675.901995 41.15 5,847.801996 43.87 6,788.501997 55.00 7,446.301998 51.00 7,834.501999 55.00 8,205.402000 70.00 8,940.402001 92.30 9,593.302002 111.50 10,239.80

Source: China Customs Bureau

Asian Development Bank

295

9.2.5 Iron Ore Fines Pricing into Asia, 1973-2002

Year Price (UScpDLTU) Year Price

(UScpDLTU)

1973 13.41 1989 26.761974 17 1990 31.031975 17 1991 33.491976 17.7 1992 31.851977 20.6 1993 28.351978 21.2 1994 25.661979 23.1 1995 27.151980 27.6 1996 28.761981 29.7 1997 29.11982 34.8 1998 29.921983 30.45 1999 26.631984 26.67 2000 27.791985 27.05 2001 28.981986 25.97 2002 28.281987 24.67 2003 30.341988 23.68

Source: The Tex Report, Iron Ore Manuals -

1975 (p175); 1980 (p21); (p.10)

1986-1987(p.30); 1995-96(p3); 2001-2002(p11);

2001-2002(p9); 2002-2003

2003 - BHP Billiton

296

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

Product Supply In 2002 (1,000 tonnes)

Forecast Supply in 2003 (1,000 tonnes) % chg

Crude Steel output 180,000 207,000 15.00 Steel products output 192,000 225,000 17.20 Steel products import 24,000 27,000 12.50 Steel products export 5,100 5,200 1.96 Apparent consumption of steel products 210,900 246,800 17.00

Data source: The State Information Centre (cited in CEIS 0409 2003, art.30)

9.4.2 China's output of major steel products, 2002

Product Output in 2002 (1,000 tonnes)

% Change Over 2001

Crude steel 181,552 20.3 Pig iron 170,745 16.1 Rolled steel 192,183 18.9 Coke 112,370 10.3 Ferroalloy 4,836 5.4 Railway steel 1,852 8.7 Heavy section 2,678 19.2 Medium section 7,316 10.8 Light section 53,038 20.9 Quality section 11,263 22.8 Wire rod 35,623 18.1 Medium plate 24,603 22.4 Sheet 22,445 11.8 Steel strip 15,051 27.6 Silicon steel 1,845 10.0 Seamless tube 6,083 18.6 Welded pipe 7,012 9.5

Data source: National Bureau of Statistics, cited in CEIS 0314 2003, art.038

300

9.4.3 Import and export of major steel products, 2002

Product Import in 2002

(1,000 tonnes)

% Change from 2001

Export in 2002

(1,000 tonnes)

% Change from 2001

Iron ore 111,496 20.7 1.0 19.1 Steel scrap 7,853 -19.7 6 -35.2 Pig iron 696 35.1 422 -39.8 Ferroalloy 93 158.4 1,330 9.2 Billet, slab 4,687 -43.9 1,352 -50.4 Finished steel 24,535 42.0 5,488 15.4 Bars, rods 1,025 39.2 1,453 54.2 Angle, shape, section 209 0.5 358 -1.8

Flat products 21,174 42.2 1,796 2.2 Wire 428 20.8 311 38.5 Pipe, tube, fittings

1,392 67.4 1,449 4.8

Stainless steel 2,594 39.5 109 64.7 HR plate>600mm 1,170 43.7 4 54.5

CR sheet>600mm 921 53.3 13 33.8

Data source: China Economic Information Service (CEIS 0314 2003, art.039)

301

9.4.4 Output of Non Ferrous metals, 2002

Metal Output in 2002 (tonnes)

% Change Over 2001

Copper 1,579,996 11.05 Copper Concentrate-based 1,306,565 12.00

Aluminium 4,358,286 26.81 Alumina - based 4,271,031 26.31 Lead 1,288,210 4.89 Lead Concentrate-based 1,157,192 9.39

Zinc 2,105,810 1.54 Zinc Concentrate-based 2,071,528 0.63

Nickel 53,528 6.10 Tin 75,068 -18.87 Antimony 123,993 -7.91 Mercury 495 157.81 Magnesium 231,739 14.68 Sponge titanium concentrate 3,648 47.99

Copper 556,067 -1.66 Lead 568,354 -4.76 Zinc 1,499,173 -6.26 Nickel 54,646 6.09 Tin 62,171 -16.36 Antimony 57,271 -39.32 Intermediary Concentrate-based Copper

1,187,113 7.73

Anode Alumina 5,444,366 14.78 Semis Copper 2,512,041 27.94 Semis Aluminium 2,744,359 14.94

Data source: China Nonferrous Metal Industry Association cited in China Economic

Information Service (CEIS 0314 2003, art.040).

302

9.4.5 Import and Export of Major Metals, 2002

Product Import in 2002

(1,000 tonnes)

% Change from 2001

Export in 2002

(1,000 tonnes)

% Change from 2001

Copper Refined 1,181 41.4 77 50.2 Alloy 44 56.2 0 48.9 Semis 918 23.9 172 38.7

Concentrate Scrap 3,080 -7.6 8 -21.7

Aluminium Refined 271 19.6 621 110.5 Alloy 311 2.6 167 46.4 Semis 476 17.7 189 39.1 Scrap 447 21.1 10 4.5 Alumina 4,571 36.6 24 -6.4

Lead Refined 31 154.7 394 -10.0 Alloy 27 62.3 25 -22.1

Concentrate Zinc

Refined 68 269.7 473 -12.7 Alloy 143 16.8 23 15.4

Concentrate Tin

Refined 3.6 29.0 32.2 -29.7 Alloy 4.4 19.1 10.4 -9.1

Nickel Refined 31.5 -11.6 4.4 -16.9 Alloy 6.9 294.2 0 -45.1

Data source: China Economic Information Service (CEIS 0314 2003, art.041).

303

9.4.6 Import Value of Major Commodities, 2002

Item Value in 2002 (US$ 1,000)

% Change Over 2001

Pig iron 895,644 -15.6 Steel billets and rough forgings

858,902 -43.2

Rolled steel 12,365,854 38.0 steel rod 529,650 31.5 angle & shaped steel 102,942 -9.9

Plate 10,179,231 38.6 Pipe 1,079,717 52.7

Standard steel fixer 539,279 34.4 Iron ore 2,769,096 10.6

Data source: General Administration of Customs (2003) cited in China Economic

Information Service, CEIS 0307 2003 arts.015 & 017.

9.4.7 China’s Import Volume of Major Commodities, 2002

Item Quantity in 2002 (1,000 tonnes)

% Change Over 2001

Pig iron 7,850 -19.8 Steel billets and rough forgings 4,600 -43.7

Rolled steel 24,490 42.2 steel rod 1,030 39.3 angle & shaped steel 230 11.7

Plate 21,170 42.2 Pipe 1,370 68.0

Iron ore 111,500 20.8 Manganese ore 2,080 21.6 Copper ore 2,070 -8.4 Chromium ore 1,140 4.8 Alumina 4,570 36.6 Coal 10,801 333.6

Data source: General Administration of Customs (2003) cited in China Economic

Information Service, CEIS 0306 2003 arts.012 & 014.

304

9.4.8 Automobile Makes, Output and Sales in China, 2002

ENTERPRISE OUTPUT SALES

FAW Car 30,165 26,629

FAW Volkswagen 191,695 207,858

Shanghai Volkswagen 278,890 301,095

Shanghai GM 93,822 93,107

Guangzhou Honda 45,075 45,209

Tianjin Automotive 89,720 95,433

Tianjin Toyota 2,147 2,040

Dongfeng Citroen 79,451 81,579

Chang’an Suzuki 67,846 65,018

South Asia 23,393 23,002

Qinchuan 16,500 17,018

Fenshen 38,897 41,060

Beijing Hyundai 1,356 1,002

SAIC Chery 20,080 20,368

Dongfeng Yueda 49,397 50,155

Jiangbei 481 481

Jiangnan 189 269

Guizhou 1,831 1,775

Harbin Aircraft 14,577 11,270

Changhe 20,564 21,018

FAW Hainan 4,576 4,023

Geely Auto 47,443 45,972

Shenyan Brilliance 8,890 8,816

Total 1,126,985 1,164,197


305

9.4.9 Automobile Output by Region, 2002

Region Output (1,000 units)

Beijing -

Tianjin 94

Hebei 19

Shanxi 1

Inner Mongolia 1

Liaoning 90

Jilin 520

Heilongjiang 185

Shanghai 392

Jiangsu 168

Zhejiang 45

Anhui 136

Fujian 48

Jiangxi 208

Shandong 20

Henan 16

Hubei 394

Hunan 28

Guangdong 65

Guangxi 172

Hainan 333

Chongqing 331

Xichuan 33

Guizhou 3

Yunnan 39

Tibet

Shaanxi 32

Gansu 4

Xinjiang 4

National total 3,251

Source: National Bureau of Statistics (cited in CEIS 0328, 2003, art.003)

306

9.5 Selected China Economic Indicators

9.5.1 Economic Data Base

307

9.5.2 China’s GDP, Trade and Output, 1981-2002

308

9.5.3 China’s Money Supply, 1981-2002

YearNarrow

Money, M1 {US$ billion}

Rate of M1 growth

(%)

Broad Money, M2

{USD billion}

Rate of M2 growth (%)

M1 to M2 Ratio

1981 76.89 113.04 0.681982 77.40 0.67 117.82 4.23 0.661983 88.29 14.07 136.96 16.24 0.641984 87.60 -0.79 128.70 -6.03 0.681985 94.24 7.58 152.27 18.32 0.621986 103.68 10.02 170.58 12.02 0.611987 122.89 18.53 213.78 25.33 0.571988 147.42 19.96 257.97 20.67 0.571989 123.55 -16.19 241.27 -6.47 0.511990 134.24 8.65 281.15 16.53 0.481991 165.40 23.21 342.26 21.73 0.481992 203.66 23.13 422.95 23.58 0.481993 288.98 41.90 598.97 41.62 0.481994 255.03 -11.75 555.52 -7.25 0.461995 288.40 13.08 730.41 31.48 0.391996 343.63 19.15 917.01 25.55 0.371997 420.61 22.40 1,099.00 19.85 0.381998 470.53 11.87 1,262.26 14.86 0.371999 553.62 17.66 1,448.13 14.72 0.382000 642.07 15.98 1,626.24 12.30 0.392001 723.37 12.66 1,847.20 13.59 0.392002 856.34 18.38 2,213.85 19.85 0.39

Source: Asian Development Bank, Key Indicators

1981-1983 key indicators 1999;

1984-2001 key indicators 2000, 2001, 2002

2002 key indicators 2003. In many cases, data in earlier years was updated from 2003

key indicator values

309

9.5.4 Debt Level Comparisons, 1981-2002

310

9.5.5 Intensity of Steel Demand, 1952-2002

YearGDP per capita {yuan}

Steel consumption

{thousand tonnes}

Intensity of Steel

Consumption {1,000 t/yuan}

YearGDP per capita {yuan}

Steel consumption

{thousand tonnes}

Intensity of Steel

Consumption {1,000 t/yuan}

1952 119 1,349 11.34 1978 379 42,578 112.341953 142 1,700 11.97 1979 417 44,863 107.591954 144 2,230 15.49 1980 460 43,005 93.491955 150 2,853 19.02 1981 489 39,201 80.141956 165 4,465 27.06 1982 525 40,935 77.971957 168 5,350 31.85 1983 580 52,349 90.261958 200 8,000 40.00 1984 692 60,834 87.961959 216 13,865 64.19 1985 853 72,540 85.051960 218 18,671 85.65 1986 956 77,549 81.091961 185 8,703 47.04 1987 1,104 72,105 65.341962 173 6,672 38.57 1988 1,355 70,689 52.161963 181 7,619 42.09 1989 1,511 71,030 46.991964 208 9,643 46.36 1990 1,634 68,279 41.791965 240 12,230 50.96 1991 1,879 70,180 37.361966 254 15,325 60.33 1992 2,287 87,010 38.051967 235 10,287 43.77 1993 2,939 126,110 42.911968 222 9,045 40.74 1994 3,923 121,810 31.051969 243 13,330 54.86 1995 4,853 101,100 20.831970 275 17,786 64.68 1996 5,575 112,460 20.171971 288 21,317 74.02 1997 6,053 119,660 19.771972 292 25,679 87.94 1998 6,307 131,700 20.881973 309 29,803 96.45 1999 6,534 151,150 23.131974 310 25,400 81.94 2000 7,082 163,240 23.051975 327 28,579 87.40 2001 7,542 196,350 26.031976 316 26,429 83.64 2002 7,972 211,230 26.501977 339 30,284 89.33

Sources: Asian Development Bank Country Key Economic Indicators 1999, 2000, 2001, 2002, 2003

International Iron & Steel Institute various yearbooks

311

9.5.6 China’s Trade with Australia, 1982-2002

Year (A$1,000) US$ million (A$1,000) US$ million

1982 766,236.00 421.43 292,891.00 161.091983 467,333.00 257.03 253,365.00 139.351984 871,197.00 479.16 354,669.00 195.071985 1,271,042.00 699.07 415,094.00 228.301986 1,587,279.00 873.00 499,627.00 274.791987 1,526,046.00 839.33 739,271.00 406.601988 1,079,102.00 593.51 886,650.00 487.661989 1,193,285.00 656.31 1,227,004.00 674.851990 1,292,788.00 711.03 1,331,050.00 732.081991 1,523,601.00 837.98 1,726,600.00 949.631992 1,875,105.00 1,031.31 2,317,470.00 1,274.611993 2,297,097.00 1,263.40 2,924,457.00 1,608.451994 2,815,148.00 1,548.33 3,373,017.00 1,855.161995 3,131,726.00 1,722.45 3,861,472.00 2,123.811996 3,877,541.00 2,132.65 4,121,992.00 2,267.101997 3,976,587.00 2,187.12 4,739,335.00 2,606.631998 3,792,032.00 2,085.62 5,822,546.00 3,202.401999 4,090,138.00 2,249.58 6,613,066.00 3,637.192000 6,008,786.00 3,304.83 9,073,206.00 4,990.262001 7,581,662.00 4,169.91 10,311,902.00 5,671.552002 8,373,151.00 4,605.23 12,847,201.00 7,065.96

Sources: DFAT, Exports of Major Commodities, Time Series Australia,

1982-1999, June 2000 pp.34-35 and subsequent correspondence

Dept of Foreign Affairs and Trade, Exports of Major Commodities, Time Series

Australia, 1984-2001, May 2002 pp.30-31

Sources (for Imports) Dept of Foreign Affairs and Trade - Composition of Australian

Trade 2001, page 163

Composition of Trade Australia 2001, DFAT, May 2002, page 43-47

Composition of Trade Australia 2002, DFAT, May 2003, pages 50 and 55

Merchandised TradeImports from Australia Exports to Australia

312

9.5.7 Industrial Added Value by China’s Regions, 2002

Region Value in 2002 (billion yuan)

% Change Over 2001

Beijing 82.33 8.0 Tianjin 82.28 17.8 Hebei 140.67 14.0 Shanxi 60.87 16.8 Inner Mongolia 36.81 19.1 Liaoning 137.62 13.1 Jilin 64.44 18.6 Heilongjiang 128.06 12.0 Shanghai 219.62 13.9 Jiangsu 353.63 15.7 Zhejiang 235.65 19.0 Anhui 65.61 15.3 Fujian 104.71 20.1 Jiangxi 36.03 16.1 Shandong 350.25 17.3 Henan 143.08 14.2 Hubei 119.90 12.3 Hunan 70.92 16.1 Guangdong 422.46 15.0 Guangxi 36.70 12.3 Hainan 6.85 19.1 Chongqing 39.74 15.2 Sichuan 91.53 17.2 Guizhou 27.04 12.1 Yunnan 63.21 8.1 Tibet 1.03 5.0 Shaanxi 53.06 14.5 Gansu 34.06 10.6 Qinghai 8.01 14.6 Ningxia 9.22 13.6 Xinjiang 36.99 8.4

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).

316

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


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


319

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).

320

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)

321

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


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


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


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


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


World Total 65,689,800 50.20 70,203,100 51.39 (4,513,300) 135,892,900 101.59





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

324

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:

7216.5010 ---Z sections 6 14 7216.5090 ---Other 3 20

-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

335

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

336

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:

337

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

338

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 %

339

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

340

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,


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,


Dagang Dalian Steel Plant Gongxing Road, Ganjingzi District, Dalian

City, Liaoning 116031 Liaoning

Dazhou Dazhou Iron & Steel Works Xiwai Town, Dazhou City, Sichuan 635002 Sichuan

342


Daye Daye Steel (Group) Company

Limited

Huangshi Road, Huangshi City, Hubei

435001 Hubei

Donggang Dongfang Iron & Steel Company

Limited Xialu District, Huangshi City, Hubei 435004 Hubei

Dazha Dalian Steel Rolling Mill Fuguo Street, Shahekou District, Dalian City,


Egang Echeng Iron & Steel Works Wuchang Road, Ezhou City, Hubei 436002 Hubei

Fugang Fushun Iron and Steel CompanyHeping Street, Wanghua District, Fushun


Fushun Fushun Iron and Steel CompanyGongnong Street, Wanghua District, Fushun


Guangdong Guangdong Shaoguan Iron &

Steel Group

Xiehe Road 10, Xizeng Road, 512123,

Guangzhou Guangdong

Guanggang Guangzhou Iron & Steel

Company

Baihedong, Fangcun District, Guangzhou

City, Guangdong 510381 Guangdong

Guangzha Guangzhou Steel Rolling Mill Gexin Road, Haizhu District, Guangzhou City,

Guangdong 510250 Guangdong

Guigang Guiyang Steel Plant Youzha Street, Nangming District, Guiyang

city, Guizhou 550005 Guizhou

Guisheng Guizhou Steel Wire Rope Plant Taoxi Road, Zunyi City, Guizhou 563000 Guizhou

Hangang Handan Iron & Steel General

Works

Fuxing Street, Fuxing District, Handan City,

Hebei 056015 Hebei

Hanggang Hangzhou Iron & Steel Group

Company

Banshan Road, Gongsu District, Hangzhou

City, Zhejiang 310022 Zhejiang

Hazha Haerbin Steel Rolling Mill Youfang Street, Xiangfang District, Haerbin

City, Heilongjiang 150300 Heilongjiang

Hegang Hefei Iron & Steel Company Hongguang Street, Dongshi District, Hefei

City, Anhui 230011 Anhui

Hengguan Hengyang Steel Tube Plant Dasuxincun, Hengyang City, Hunan 421001 Hunan

Hugang Huhehaote Iron & Steel Works Hugang Road, Huhehaote City, Inner

Mongolia Autonomous Region 010050 Neimenggu

Huguan Huladao Steel Tube General

Works

Xinggong Street, Lianshan District, Jinxi City,


Hu Yichang Shanghai Yichang Sheet

Company Limited

SitangTown, Baoshan District, Shanghai City,

200431 Shanghai

Jiangsu Jiangsu Xigang Group 124 Tangnan Road, 214026 Wuxi Jiangsu

343


Jigang Jinan Iron & Steel Group

Company

Industry Road (North), Jinan City, Shandong

250101 Shandong

Jiugang Jiuquan Iron & Steel Group

Company

Xiongguan Road, Jiayuguan City, Gansu

735100 Gansu

Kungang Kunming Iron & Stee+B76l

Company

Langjiazhuang, Anning County, Kunming city,

Yunnan 650302 Yunnan

Laigang Laiwu Iron & Steel General WorkYouyi Street, Gangcheng District, Laiwu City,

Shandong 271104 Shandong

Langang Lanzhou Iron & Steel Group

Company

Donggang Town, Chengguan District,

Lanzhou City, Gansu 730020 Gansu

Lengtie Lengshuijiang Iron & Coke

General Works Lengshuijiang City, Hunan 417500 Hunan

Lingang Linfen Iron & Steel Company No 3 Qiaodong, Linfen City, Shanxi 041000 Shanxi

Linggang Lingyuan Iron & Steel CompanyLingbei Street, Lingyuan City, Liaoning

122500 Liaoning

Liugang liuzhou Iron & Steel Group

Company

No. 117 Beicui Road, Liubei District, Liuzhou

City, Guangxi Autonomous Region 724300 Guangxi

Luegang Lueyang Iron & Steel Works Dagoukou, Chengguan town, Lueyang

County, Shaanxi 724300 Shaanxi

Luogang Luoyang Steel Plant Guanlin Town, Luoyang City, Henan 471023 Henan

Maanshan Maanshan Iron & Steel Co Ltd 8 Hong Qi Zhong Road, 243003 Maanshan Anhui

Meishan Shanghai Meishan Group

Company Limited

Zhonghuamenwai, Nanjing City, Jiangsu

210039 Jiangsu

Nanchang Nanchang Iron & Steel Compan

Limited

Loujiaji, Nanjing City, Jiangxi Province

210035 Jiangxi

Nanjing Nanjing Iron & Steel Group

Company Limited

Xiejiadian, Dachang District, Nanjing City,

Jiangsu Province 210035 Jiangsu

Nanzha Nanjing General Steel Rolling MChanghong Road, Jianye District, Nanjing

City, Jiangsu 210017 Jiangsu

Pangang Panzhihua Iron & Steel Group

Company

Dong District, Panzhihua City, Sichuan

617067 Sichuan

Pinggang Pinxiang Iron & Steel Works Xiangdong District, Pingxiang City, Jiangxi

337019 Jiangxi

Pugang Shanghai Pudong Iron & Steel

(Group) Company Limited

300 Shangnan Road, Pudong District,

Shanghai City 200126 Shanghai

Qinggang Qingdao Iron & Steel Group

Company

Zhuyi Road, Chuncang District, Qingdao City,


Sanming Sanming Iron & Steel Works Liexi Street, Sanming City, Fujian 365000 Fujian

344


Shaangang Shaanxi Steel Plant Xingfu Road, East Suburb, Xian City, Shaanxi

710043 Shaanxi

Baoshang Shanghai Baosteel Group CorpFujin Road, Baoshan District, Shanghai City

201900 Shanghai

Shangang 1 Shanghai No. 1 Iron & Steel


735 Changjiang Road, Baoshan District,

Shanghai City 200431 Shanghai


(Group) Company Limited 1151 Xinzhaozhou Road, 200011 Shanghai



332 Tongji Road, Baoshan District, Shanghai

City 200940 Shanghai

Shaogang Shaoguan Iron & Steel Group

Company

maba, Qujiang County, Shaoguan City,

Guangdong 512123 Guangdong

Shenxian Shenyang Wire Rod Mill Block 1, Xinggong Street, Tiexi District,

Shenyang City, Liaoning 110025 Liaoning

Shenzha Shenyang General Steel Rolling

Mill

Block 2, Xinggong Street, Tiexi District,

Shenyang City, Liaoning 110021 Liaoning

Shenzong Shenyang Iron & Steel General

Works

Chenxiangtun District, Shenyang City,


Shigang Shijiazhuang Iron & Steel WorksHeping Road (East), Changan District,

Shijiazhuang City, Hebei 050031 Hebei

Shizuishan Ningxia Shizuishan Iron & Steel

Works

Hebin District, Shizuishan City, Ningxia

Autonomous Region 753202 Ningxia

Shougang Shoudu Iron & Steel Company Changdongmen, Shijingshan District, Beijing

City 100041 Beijing

Shuigang Shuisheng Iron & Steel Group

Company

Zhongshan District, Shuicheng County,

Guizhou, 553028 Guizhou

Sugang Sugang Group company Limited Hulan Town Suzhou City, Jiangsu 215151 Jiangsu

Taigang Taiyuan Iron & Steel Group

Company Jiancaoping, Taiyuan City, Shanxi 030003 Shanxi

Tanggang Tangshan Iron & Steel Group

Company Limited

Binhe Road, Lubei District, Tangshan City,

Hebei 063016 Hebei

Tiangang Tianjin Tiangang Group Compan

Limited

Zhangdazhuang Street, Hedong District,

Tianjin City 300180 Tianjin

Tianguan Tianjin PIpe Company Wuxia Street, Dongli District, Tianjin City

330301 Tianjin

Tiantie Tianjin Tiante Metallurigical

Group Company Limited Gengyue Street, She County, Hebei 056404 Hebei

Tonggang Tonghua Iron & Steel Dongshen Road, Erdaojiang District,

Tonghua City, Jilin 134003 Jilin

345


Weigang Weiyuan Iron & Steel Works Lianjie, Weiyuan County, Neijiang City

Sichuan 642469 Sichuan

Wugang Wuhan Iron & Steel Group

Company

Changqian Street, Qingshan District, Wuhan

City, Hubei 430083 Hubei

Wuhu Wuhu Iron & Steel Works Wugang Road, Wuhu City, Jiangsu 241002 Jiangsu

Wuxi Wuxi Steel Group Tangnan Road, nanchang District, Wuxi City,

Jiangsu 241026 Jiangsu

Wuyang Wuyang Iron & Steel CompanyWugang District, Pingdingshan City, Henan

462500 Henan

Xi'an Xian Iron & Steel Works Hongguang Road, West Suburb, Xian City,

Shaanxi 710077 Shaanxi

Xianggang Xiangtan Iron & Steel CompanyYuetang District, Xiangtan City, Hunan

411101 Hunan

Xigang Xilin Iron & Steel Group CompanXinxing Street, Xilin District, Yichun City,

Helongjiang 153025 Heilongjiang

Xinggang Xingtai Iron & Steel Group

Company Limited

Gangtie Road, Qiaoxi District, Xingtai City,

Hebei 054027 Hebei

Xining Xining Special Steel Group

Company Limited

Chengbei District, Xining City, Qinghai

810005 Qinghai

Xinjiang Xinjiang Bayi Iron & Steel

Company Limited

Toutunhe District, Wulumuqi City, Xinjiang

Autonomous Region. Xinjiang

Xinyu Jiangxi Xinyu Iron & Steel

Company Limited Yushui District, Xinyu City, Jiangxi 336501 Jiangxi

Xuangang Xuanhua Iron & Steel CompanyPailou Steel (East), Xuanhua District,

Xuanhua City, Hebei 075103 Hebei

Xugang Xuzhou Iron & Steel General

Works Yangzhuang, Xuzhou City, Jiangsu 221004 Jiangsu

Yichang Yichang Bayi Iron & Steel Group

Company Limited Wujiagang, Yichang City, Hubei 443001 Hubei

Yingban Yingkou Plate Plant Laobian District, Yingkou City, Liaoning

115005 Liaoning

Zhangdian Zhangdian Iron & Steel Works Zhongxin Road, Zhangdian District, Zibo City,


346

9.19 State Council

For reference, the following is a list of the new structure of the State Council, which was

adopted on 10 March 2003 at the third plenary meeting of the 10th National People's Congress:

1. Ministry of Foreign Affairs

2. Ministry of National Defence

3. State Development and Reform Commission

4. Ministry of Education

5. Ministry of Science and Technology

6. Commission of Science, Technology and Industry for National Defence

7. State Commission for Nationalities Affairs

8. Ministry of Public Security

9. Ministry of State Security

10. Ministry of Supervision

11. Ministry of Civil Affairs

12. Ministry of Justice

13. Ministry of Finance

14. Ministry of Personnel

15. Ministry of Labor and Social Security

16. Ministry of Land and Resources

17. Ministry of Construction

18. Ministry of Railways

19. Ministry of Communications

20. Ministry of Information Industry

21. Ministry of Water Resources

22. Ministry of Agriculture

23. Ministry of Commerce

24. Ministry of Culture

25. Ministry of Health

26. State Commission for Population and Family Planning

27. People's Bank of China

28 Audit Office.

Source: China Economic Information Service (CEIS 0311 2003, art.049)