Steel Demand May Improve on 'One Belt One Road'

This analysis is by Bloomberg Intelligence analysts Yi Zhu and Kenneth Hoffman. It originally appeared on the Bloomberg Professional service. 

China’s Steelmakers May Go West as New Trade Route Materializes
Building the “One Belt, One Road” trade route to Europe could eventually boost demand for steel. The start of construction over the next five years could add as much as 5% a year to Chinese steel demand, though only 10% of needed funding has been secured. The government is asking China’s steelmakers to “go global” by building plants in Southeast Asia, west Asia and Africa along the new trade link. This would shift China’s steel capacity to the west as it becomes easier to bring in raw materials.

Photographer: Paul Hilton/Bloomberg News

Chinese Steel Capacity May Go West With ‘One Belt, One Road’
The large-scale investments needed to build the “One Belt, One Road” trade route to Europe will boost demand for steel and encourage a shift in China’s production capacity to the west as it becomes easier to bring in raw materials. New organizations dedicated to the project include the Asian Infrastructure Investment Bank and the Silk Road Fund. China Development Bank, one of the government’s three policy banks, will invest more than $890 billion in at least 900 projects in 60 countries.

New Trade Route to Europe Set to Boost Chinese Steel Demand
Construction of the “One Belt, One Road” trade route from China to Europe, if funded for the entire $8 trillion said needed, may generate demand for a total 272 million tons of steel. If the program was fully funded (only 10% has been raised) and rapidly put in place over five years, it could add as much as 5% a year (or 24% through 2020) to Chinese steel demand. BI assumes 34 tons of steel products are consumed for every $1 million of investment in railways, pipelines and other projects. (Adds annual percentage.)

Chinese Steel Mills Go Global With Overseas Mines, Mills Nearby
China’s government is asking steelmakers to “go global” by seeking iron-ore mines overseas and building integrated steel mills nearby. They are also encouraged to establish joint ventures to set up overseas steel plants. Hebei, the largest steel-producing province, plans to relocate 5 million tons of capacity by 2017 and 20 million tons by 2023 to Southeast Asia, West Asia and Africa. Going overseas can help offset closures of Chinese plants and may reduce anti-dumping cases against Chinese firms.

China Steelmakers May Upgrade for `One Belt, One Road’ Project
The new “One Belt, One Road” trade route to Europe may push China to upgrade its steel industry to produce more high-end products. The nation may also relocate steel mills from coastal areas to the interior. Building pipelines and high-speed railways requires higher-value steel products, which may increase revenue for producers including Baosteel and Magang. Steel demand from less-developed inland and west China may improve as the trade route is built.

China’s Low-End Steel Capacity May Follow Overseas Trade Route
Construction of the new trade route to Europe may prompt China to build more capacity overseas for low-end steel products. China has a shortage of high-end steel offerings but a surplus of about 200 million tons for cheaper products. While China might export excess capacity, it has incentive to build mills in countries along the new trade link. Relocated production would give China better access to raw materials and avoid pollution restrictions and low margins that encumber existing domestic mills.

Demand for Steel Yet to Rise on Planned Trade Route to Europe
Short-term steel demand has yet to be lifted by plans for the “One Belt, One Road” trade route to Europe amid a lack of clarity on scheduling and spending budgets. Relatively low returns on investment for infrastructure projects may discourage profit-driven private investors. China’s local governments also may lack funds to construct railways, roads and other projects linking to western China. Government revenue this year has been hurt by falling land sales and lower tax revenue.

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