twin peak The Economist

The Economist April 4th 2015
to swallow. BHP Billiton, an Australian miner, insists that Chinese demand will keep growing robustly for years. Sam Walsh of Rio Tinto, a British colossus, has predicted that steel production in China will keep rising and eventually reach 1 billion tonnes a year (compared with about 823m tonnes last year). But such notions may prove to be wishful thinking. By one estimate, these and other mining ?rms have together splashed out $120 billion since 2011 on new iron-ore deposits. In a sign of how China’s cooling demand for steel is a?ecting ore miners, last month Fortescue, an Australian company, was forced to call o? a $2.5 billion bond issue, having days earlier tried to raise the same amount through the loans market. CITIC, China’s largest state-run conglomerate, recently announced that its net pro?ts fell by nearly 18% last year thanks in part to the troubled iron and steel markets. It was forced to take an impairment charge of $2.5 billion on a massive iron-ore project in Australia that has run into delays and cost overruns. Aside from the risk of undermining the rationale for investments such as these, what are the potential knock-on e?ects of China hitting peak steel? Trade wars, for a start. Unable to peddle all of their output at home, Chinese steel producers have been exporting increasing quantities—to the consternation of producers elsewhere, who accuse them of dumping. MEPS, a consulting ?rm, estimates that China exported more than 90m tonnes of steel last year, which is greater than the entire output of America’s steel industry and was a rise of over 50% on the previous year. Exports are continuing to surge this year. Western steelmakers are pressing their politicians to protect them against the wave of cheap Chinese imports. On March 25th the European Union said it would impose anti-dumping duties of up to 25.2% on various stainless-steel products from China, as well as from Taiwan, after European steelmaking’s trade body, Eurofer, accused mills in both countries of unfair dumping. The next day, the bosses of America’s steel companies went to Capitol Hill to press

Business 61
their congressmen to take similar action. Unless China ?nds ways to moderate its exports (the recent elimination of an export-tax rebate on certain steel alloys may help, for example), these grumbles may end up at the World Trade Organisation. The bigger impact, though, could be in China itself. Its steel industry is highly fragmented, woefully ine?cient and burdened with excess capacity. The central government has tried to force the many state-supported ?rms to consolidate, but recalcitrant provincial o?cials keen on preserving local jobs have scuppered such e?orts. There are reports that the industry ministry is preparing a fresh push to restructure Chinese steelmaking by making it easier for troubled mills to go bust. A sign of the central government’s desire for a shakeout is its recent decision to end a long-standing ban on foreign investors owning majority stakes in local steel ?rms. In the current climate, however, it seems unlikely there will be any great rush by foreigners to buy them. Even though senior industry ?gures such as Mr Zhang are acknowledging that the good times are over, it may yet be some time before economic logic prevails in the Chinese steel business. 7


Twin peaks

Startups in Mexico

China’s steel production and consumption may soon start falling



OR three decades China has been a steelman’s paradise. Years of doubledigit economic growth and relentless urbanisation gave the country an increasing appetite for the alloy. Steel went into everything, from buildings and infrastructure to cars and appliances. Consumption in China has risen at an average rate of15% a year since the turn of the century, and at 689m tonnes last year it made up almost half of the world’s total usage. Alas, the ferrous ?esta may soon fade. China’s annual growth rate has slowed from double-digit ?gures to around 7%. The massive investments in infrastructure that the government unleashed as a stimulus response to the global ?nancial crisis are subsiding. Property markets around the country are cooling fast, leaving developers with a nasty debt hangover. The upshot is that China may be close to “peak steel”. Analysts at Morgan Stanley, an investment bank, believe that this is the year in which the country’s consumption and production will reach its apex, to decline gently thereafter (see chart). Zhang Guangning, chairman of the China Iron and Steel Association, recently declared that “China’s steel production has already hit a peak.” For the handful of big ?rms that produce most of the world’s iron ore, the raw material for steel, such arguments are hard

A nascent tech hub may succeed by solving local problems


Metal fatigue
China?s steel
Tonnes m

FORECAST Production

850 750 650 550


450 350

2007 09





19 20

Source: Morgan Stanley

N ON-CALL masseuse is the clearest sign of Kueski’s ambitions to be a Silicon Valley-style tech star, perks and all. But the startup, which lends money to middleclass people starved of credit, is based not in San Francisco but a four-and-a-half hour ?ight to the south, in Guadalajara—a Mexican city more associated with tequila, conservative families and Catholicism than the modern religion of entrepreneurship. Guadalajara has long been a magnet for American electronics ?rms. Motorola arrived here in 1968, followed by IBM, Hewlett-Packard and various contract manufacturers, all of whom produced mainly for export. According to Erik Peterson of Oracle, an American technology ?rm that opened its third global development centre here in 2011, the city is now progressing from churning out hardware in bulk to creating software, somewhat like a textile factory moving into designing its own clothes. “It’s the most tightly knit tech community in Latin America,” he says. Last year Jalisco, Guadalajara’s home state, exported almost 25 times as much tech as te1 quila, in dollar terms.


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