Academic journal article The McKinsey Quarterly

Remaking China's Giant Steel Industry

Academic journal article The McKinsey Quarterly

Remaking China's Giant Steel Industry

Article excerpt

The country's domestic market for steel, and the industry that supplies it, are now the world's largest. But the steelmakers of China are too fragmented and unproductive to serve its real needs.

China's steel market has quickly become the world's largest, and demand is set to soar during the next decade. Yet the country's steel producers are in poor shape to take advantage of their homeland's boom. Fragmented, uncompetitive, unprofitable, heavily in debt, and geared to the wrong products, they are losing out to imports.

But all is far from lost. Given steel's strategic importance, the Chinese government is intent on remaking the industry to achieve international competitiveness. In addition to vigorously pushing for the industry restructuring that is needed to restore profitability to the main producers, which are still predominantly state owned, Beijing is forcing them to go to the private sector for the money they desperately need for growth.

Foreign and local private investors, as well as regional governments, have their eye on the booming demand, but many of them have decided to wait for additional restructuring before they act. To overcome the legacy of state planning, mills must shed their production quota mind-set and focus on what their customers want. Operational improvements to boost productivity and strategic alliances are required as well. Companies that move first have a chance to transform the industry and to become tomorrow's leaders.

A growing appetite for steel

On the back of surging construction and infrastructure investments, demand for steel in China has more than quadrupled since 1980 while Japan, Western Europe, and the United States have experienced single-digit growth rates. China consumed more than 130 million tons [1] of steel in 2000, surpassing the United States to become the biggest market in the world. Chinese producers, generating 3 percent of the nation's gross domestic product and employing more than three million people, supply 87 percent of the domestic market.

Yet China is still only in the early stages of burgeoning demand. There is a well-established relationship between a country's GDP and steel consumption (Exhibit 1). China uses a mere 0.12 kilograms per dollar of GDP, or 92 kilograms per head, whereas Malaysia, for example, consumes 450 kilograms per head. Partly closing that gap in the coming decade could double demand even if new technologies allowed China to bypass some of the more steel-intensive phases of economic development.

Part of the demand for steel will involve relatively cheap long products used in construction. China's steel industry concentrates on them, but stricter building codes will augment the growing demand for high-quality construction steel. Growth will be even faster in the market for higher-value-added flat products, above all for world-scale customers in the automotive, appliance, and assembly sectors. Markets for stainless, galvanized, coated, and other more complex processed steels are expected to grow faster still. Because China is short of the plants needed to make these products, it imports them from Europe, Japan, South Korea, and the United States.

Annual demand is set to increase by 50 million tons, to more than 182 million tons, by 2005, but no more than 27 million tons of net planned expansion capacity can be identified. This implies a gap, chiefly in flat products, of up to 44 million tons in the supply of finished steel by 2005--a gap that can be filled only by imports or higher productivity. The capacity shortfall is the unsurprising result of the downward spiral of profitability and investment since the early 1990s: some township and collective enterprises have built small plants with minimill technology, but only one large greenfield mill was built during the decade, and the level of investment dropped by 50 percent from 1995 to 1999.

If these trends continue, China's steel industry will become increasingly incapable of serving the country's needs. …

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