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Randy Kirk

4/6/11

   

Steel consumption in China represented approximately 48% of world total in 2009. Most
analysts have noted the incredible amount of steel consumed in China in 2009 ʹ over 560
million tonnes ʹ without going shedding light on how much infrastructure and consumer goods
this massive quantity of steel actually represents. The analysis presented in this section will go
beyond these existing analyses by calculating, based on publicly available sources, the end use
demand of steel in China.

Steel consumption is calculated for China for infrastructure (skyscraper, residential apartment,
expressway, rail lines, airport, bridges), energy (oil pipeline, refinery, power plant), factory and
warehouse, container, automotive, bridges, shipping, machinery, defense and other in this
report. Results are presented in figure 2, with sources and estimates included.

 

 
 
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The majority of analysis by the major iron ore exporters (Vale, BHP and Rio Tinto)(Annual
Reports, Vale, BHP and Rio Tinto) as well as the major steel producers worldwide (Baosteel of
China, Arcelor Mittal)(Annual Reports, Baosteel and Arcelor Mittal), the major steel trade
organizations (the World Steel Association) and consultancies (the McKinsey Global Institute)
(McKinsey, 2009)have provided cursory analysis of Chinese steel demand to a public audience,
preferring to present overall consumption numbers per capita of steel, urbanization rate
statistics and average consumption of steel intensive goods, such as automobiles, per capita.
The leading sources of information concerning steel statistics within China ʹ Steel home (a
joint venture set up in 2004 between the Chinese government and Shanghai based
entrepreneurs to provide data on Chinese steel usage) (SteelHome, 2011) ʹ and the National
Bureau of Statistics of China (NBSC, 2011)do not provide detailed steel consumption figures
per application within China, only overall numbers of total consumption and across regions.
In so far that China can be seen as two or more countries ʹ a relatively wealthy coastal region
and a relatively rural central and eastern region ʹ an analysis of steel usage per capita would
not accurately capture several aspects of Chinese steel consumption, as it is unlikely that China
will fully urbanize to western rates within a decade. Equivalent numbers of steel consumption
per capita in China verses western countries (note that China surpassed the US in 2011 based
on steel consumption per capita) will likely mean much higher steel consumption per capita in
urban areas in China ʹ however per capita statistics will not shed light on which application of
steel (construction, energy, auto, expressway, etc.) is used in the higher steel intensive areas.

Note that it is likely that internally, the major iron ore and steel producers have much more
comprehensive analysis of steel consumption in China, however, for the purposes of
impressing investors, only a brief analysis is presented. For example, Vale, it is 2010 Investor
Day´s presentation, presents the following chart to support the continued growth of steel
consumption in China, which can hardly be called comprehensive in scope.

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Source: Vale 2010 Investor´s Day Presentation (Vale, 2010)

Perhaps the most comprehensive publicly available analysis is a 2010 report by the Reserve
Bank of Australia ʹ as Australia is heavily dependent on mineral exports to China, the RBA
presents significant analysis of internal Chinese industrial dynamics (Holloway, 2010). Note
however, that the RBA analysis only segregates Chinese market demand into flat products (for
consumption of steel) and structural products (for construction), and does not go into detail
concerning individual end use markets.

 
  
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Note that for certain end markets in China, such as automotive and oil and gas pipeline steel
usage, the consumption numbers can be calculated with reasonable certainty. This is due to
the fact that total production numbers in these sectors can be found from relatively reliable
sources (government agencies, respected research institutions) and the steel per unit is also
known with reasonable certainty, also from reliable sources. For other end use markets, such
as large scale buildings (skyscrapers) and apartment construction, the total Chinese
construction numbers are known with low certainty. Note that the certainty of the numbers
for steel consumption is indicated in Figure 2 below by sector. However, it should be realized
that not having complete certainty in all end use markets is actually potentially useful to an
analyst, because discrepancies in the total calculated steel usage in Figure 2 and the total,
actual steel usage in 2009 for China can be re-assigned to the areas in which the steel
consumption is not known with certainty. This is to say, if almost all areas of steel demand can
be based on reliable sources (official government figures, respected bank figures) but some
other areas are not known but estimated, the excess of actual steel production over the
calculated steel consumption can be implied to occur in the areas with less certainty (this last
point sounds complicated, but will be discussed in further detail below).

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Guide: = estimate of annual production figures based on uncertain forecasts, revision
possible = estimate of annual production based on reliable sources, estimate of
future production based on uncertain forecasts, but analysis estimate believed to be
conservative (if any error, in the direction of too much annual steel usage in this chart)

Items in bold font are total steel usage calculations for each category of steel usage, based on
the steel usage estimates in normal font.

Project Name Tons Notes Source of Information Concerning

Steel Steel Usage and
Used Construction/Manufacturing
Estimates:
Willis Tower 76000 total steel used, http://skyscraperpage.com/cities/?b
tallest building in uildingID=5
the US
World Trade Center 100000 per tower, 200,000 http://www.infoplease.com/spot/wt
tons used total c1.html
Empire State 60000 http://jutiagroup.com/20080625-
Building the-asian-skyscraper-boom/
Average Skyscrapers 78,667

1000 massive 78666667 Based on 30 years http://jutiagroup.com/20080625-

skyscrapers per year to av US the-asian-skyscraper-boom/
eqiv skyscraper to pop
ratio (A)
30 Story Apartment 10000 per building
Building
1000 large 10000000 10M sq meters http://chinahousing.mit.edu/englis
 Apartment added per year h/china/housing/
Buildings per year
eqiv
]il and Gas Pipelines 300 per km http://www.oilandgaseurasia.com/a
rticles/p/111/article/1093/
12000 km pipelines 3600000 Based on CNPC http://www.interfax.cn/news/1675
per year estimates 8

Golden Gate Bridge 83000 total bridge http://www.goldengatebridge.org/r

esearch/factsGGBDesign.php
Akashi Kaikyō Bridge 181000 http://www.technologystudent.com
/culture1/akashi1.htm
Average Bridges 132000
5 la rge scale Bridges per660000
year Estimate based on
Bridge Projects,
China (B)
]il Refinery 12000 per 100,000 bpd http://www.supermetal.com/metal-
refinery structure/projects/scotford-shell-
refinery-upgrader.aspx
1Mbpd new 120000 Based on Sinopec http://www.chinadaily.com.cn/bizc
Refining Capacity estimates hina/2010-
Annually 05/25/content_9890521.htm
0,6 per car on average, http://www.usatoday.com/money/a
Automotive 9.6M cars sold utos/2009-02-10-china-auto-
annually in China sales_N.htm
10M annual car 6000000
sales
1290000 For all rail http://www.steelorbis.com/steel-
Railway news/latest-news/steel-
consumption-for-high_speed-
railways-to-increase-in-china-
430371.htm
2250KM annual 4515000 According to the http://gz.focus.cn/news/2011-02-
new rail Chinese Min of 05/1185627.html
Transport
Highway 100 per km pubs.usgs.gov/fs/2006/3127/2006-
expressway, assum 3127.pdf
25% higher than US
(C)
1000000 According to http://www.newgeography.com/c
10000km annual China´s Ministry of ontent/002003-china-expressway-
Added expressways Transport system-exceed-us-interstates
Electrical Grid 20000000 Total steel used in http://www.williamblair.com/docu
transmission, est. ments/ElectricitySectorInChina.pdf
William Blair, 2010
17000 per coal power http://www.rdmag.com/News/Feed
Power Plant plant, 1000MW s/2010/07/materials-thyssenkrupp-
to-supply-17000-tons-of-steel-for-
sou/
100 1GW power 1700000 According to http://www.world-
plants added power forecasts to nuclear.org/info/inf63.html
 annually 2015 for China (D)
Airport 60000 2x Steel used in SF http://www.modernsteel.com/Uplo
airport ads/Issues/February_2000/0002_02
construction _hassetferch.pdf
8 Airports 480000 According to Vale
Constructed Year 2010 Investor´s
Day
VLCC (Ships) 108000 Per 310,000 Tons http://www.aukevisser.nl/supertank
ers/part-1/id713.htm
42M DWT VLCC year 14632258 Chinese ship http://www.china.org.cn/business/
production in 2010 2010-01/25/content_19304098.htm
White Goods 18900000 7 times US http://www.steel.org/en/About%2
production of 0AISI/Statistics.aspx
white goods,
assumed (D)
Container 25200000 7 times US http://www.steel.org/en/About%2
production of 0AISI/Statistics.aspx
contains, assumed
(D)
Defense Related 5400000 Same as US http://www.steel.org/en/About%2
production (D) 0AISI/Statistics.aspx
Other 37800000 7 times US http://www.steel.org/en/About%2
production cat: 0AISI/Statistics.aspx
other, assumed (D)
Machinery + 75600000 7 times US http://www.steel.org/en/About%2
Factories production mach & 0AISI/Statistics.aspx
factories, assumed
(D)
Total: 30321042
5

Steel Consumption 56780000 According to the http://www.worldsteel.org/pictures

China 2009 Actual 0 World Steel /newsfiles/2009%20graphs%20and
]rganization %20figures.pdf
50% Construction 28390000 According to the
0 Reserve Bank of
Australia, for China

Notes:

(A) The estimate for skyscrapers is based on an assumed 30 year period for China to attain
the ratio of skyscrapers to people as realized in the United States. Each skyscraper is
assumed to utilize as much steel as on average as the average of three of the largest
skyscrapers in existence today (Willis Tower, tallest building in the US, World Trade
Center (NY) and the Empire State Building).
(B) The amount of steel utilized in bridge construction is believed to be conservative
because the total amount of steel even in building an average of 5 bridges the average
size of the longest bridge in the world (Akashi Kaikyō Bridge in Japan) and the 9th
 largest bridge in the world (Golden Gate) is only 132,000 tons of steel per bridge,
totaling less than 1 million tons per year of steel usage.
(C) Steel is used in expressways to reinforce concrete. China is assumed to use 25% more
steel per KM than the US in its interstate system. Estimates are based on the Chinese
Ministry of Transportation Estimates.
(D) For categorieslabeled ´´D´´ in the Chart above, these categories were difficult to find
reliable estimates of production for China. The steel usage for these categories (white
goods, Machinery and Factory construction, military, container and other) are arrived
at through the taking of known US 2009 steel production in these categories and
conservatively multiplying this number by 7 (7 is chosen because it is a relatively high
number). Note that the military steel usage is assumed to be the same as US steel
usage ʹ as the US has the most military expenditures in the world.

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The analysis in Figure 2 shows several items. First, certain end markets consume much more
steel than others in China. For example, the construction and completion of an equivalent of 5
Golden Gate bridges (the Golden Gate Bridge is the 9th longest bridge in the world) per year
will consume significantly less than 1 million tons of steel per year, (Goldengatebridge.org,
2011) and the construction of an incredible 100 1,000 MW coal power plants will only
consume an estimated 1.7M tons of steel per year. (R&D, 2010) Note that China´s 2009 steel
consumption was approximately 568M tons of steel, so Chinese power plant construction and
bridge construction can only (under any reasonable scenario) consume only a fraction of the
total steel consumption in China. The calculated steel usage per application is presented in
Figure 3.
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Perhaps the most striking takeaway from Figure 2 is that the calculated steel consumption is
far less than the actual steel consumption in China for 2009. This is to say, the actual steel
consumption in China is nearly 90% higher than the calculated steel consumption: a calculated
303.2M tons of steel in Figure 2 verses an actual consumption of steel of 567.8M tons ʹ a
difference of 264.6M tons. As the areas in the chart above labeled with a ´green check´ are
known with reasonable certainty, and the areas of consumption labeled with a yellow check
are estimated conservatively (this is to say, that the actual steel consumption is likely not
above the estimated steel consumption, due to high estimates for Chinese consumption in
Figure 2), the remaining steel consumption is likely in the categories labeled with a ´red
question mark´ -- skyscraper construction and residential construction. It is proposed that it is
likely that China is building more than 1000 equivalent skyscrapers (which use the average
steel content of the three largest skyscrapers in the US) ʹ more in the area of 3000 to 4000
equivalent per year. This is an incredible number, in so far that if China has 95 cities with more
than 1 million people, China is likely constructing an average of well over 10 to 40 World Trade
Centers in each of these cities › ›
›


Implications:The takeaway from the analysis in this section is that steel consumption in China
appears to be driven by large scale office and residential construction ʹ areas of construction
which are likely driven by Chinese governmental stimulus spending, and areas which probably
mean that supply can with reasonable probability exceed demand in the near future (if not
currently, particularly in office). Therefore, as China is the major export market for iron ore
based on office and residential construction demand, Vale is recommended to exercise caution
in this intermediate period ʹ when Chinese consumption is paramount in importance and
before India can take up the slack as a major consumer of steel. These actions of the part of
Vale would be hedging future iron ore prices at near record levels currently, where possible,
and locking in long term financing at lower rates, perhaps considering utilizing Vale´s currently
record high stock price to solidify its industry position over the long term by doing acquisitions
of other iron ore and base metal mining companies through all stock deals.

China Can Afford to Continue to Spend on Infrastructure Stimulus = It should be noted

that China is very capable of continuing stimulus spending to support construction to drive
steel consumption growth, at least over the next decade, if not longer. Chinese governmental
debt to GDP is estimated at only 21.9% in 2010, increasing only 370 basis points from 17.6% in
2009, according to the IMF, even afterChinese governmental stimulus package estimated at
close to 9% of GDP in 2009. (IMF, 2009) China´s debt to GDP numbers are very favorable
compared to other industrialized nations as shown in Figure 4.If China adds an additional 400
bps to debt per year by stimulus spending, China will reach the average of
industrializednations debt to gdp of 81.6% in 15 years. Further, it should be noted that
according to the chief economist at Nomura, Richard Koo, China remains committed to
stimulus spending to drive economic growth. (Koo, 2010)

:igure 4: Debt to GDP Levels, Industrialized Nations:

Source: IMF, 2009

The balance of the analysis of Chinese steel consumption is that China likely is close to an
oversupply of office and residential space over the near term, but is committed and has the
financial capability to continue to spend on infrastructure going forward, for a substantial time
frame ʹ 15 years at least at the current rate of stimulus spending. The risk for Vale for
significantly lower steel production in China over the next decade is therefore assessed, based
on the balance of these factors, as moderate to moderately low. This should allow China to be
a significant market for iron ore exporters on the balance of probabilities until India can
become a future large scale importer of iron ore, perhaps with some stress and ´nail-biting´ at
for top management at the major steel producers, such as Baosteel, and the major iron ore
mining firms, such as Vale, in the intervening period, however.
± 


Goldengatebridge.org. (2011). s
›s›
›=

    . Acesso em 29 de 3
de 2011, disponível em Golden Gate Bridge Highway and Transport District:
http://www.goldengatebridge.org/research/factsGGBDesign.php

IMF. (2009). s

  

  ›  


 
http://www.imf.org/external/pubs/ft/spn/2009/spn0913.pdf: June.

Koo, R. (2010). ›
›  
 
. Acesso em 29 de 3 de 2011, disponível em
Institute for New Economic Thinking: http://ineteconomics.org/video/clip/china-
played-global-collapse-perfectly-richard-koo

McKinsey. (March de 2009). 
›



 


. Acesso em 28 de 3 de 2011,
disponível em McKinsey Global Institute:
http://www.mckinsey.com/mgi/reports/pdfs/china_urban_billion/China_urban_billion
_full_report.pdf

MIT. (10 de ]ctober de 2010).  
›
 › 
  › 
› ›
   ›. Acesso em 29 de 3 de 2011, disponível em Sustainable Urban Housing in
China: http://chinahousing.mit.edu/english/china/housing/

NBSC. (2011).  

›   

  › ›. Acesso em 29 de 3 de 2011,
disponível em National Bureau Statistics of China: http://www.stats.gov.cn/enGliSH/

R&D. (25 de 7 de 2010). !›
 
"#$$$!  ››

 %
 ›


. Acesso em 29 de 3 de 2011, disponível em R&D:
http://www.rdmag.com/News/Feeds/2010/07/materials-thyssenkrupp-to-supply-
17000-tons-of-steel-for-sou/

SteelHome. (2011). ››
›. Acesso em 2011 de 29 de 3, disponível em SteelHome:

http://en.steelhome.cn/

Steel]rbis. (28 de 1 de 2008). ››
  
 ››

  
›› 
 .
Acesso em 29 de 3 de 2011, disponível em Steel]rbis:
http://www.steelorbis.com/steel-news/latest-news/steel-consumption-for-
high_speed-railways-to-increase-in-china-430371.htm