China’s Not Necessarily
the Evil You Imagine

America can’t possibly compete against the evil Chinese because they hold such an insurmountable labor advantage and have no scruples when it comes to fair trade. So goes the prevailing view among many in metals. So it was comforting, at two recent conferences, when U.S. mill execs offered a glimpse of the Chinese boogeyman in steel’s closet.

Addressing MSCI’s Carbon Conference last month in Arizona, John Surma, chief executive at U.S. Steel Corp., noted that Chinese steel production exploded from 150 million tons in 2000 to 350 million tons last year. Huge inflation in the cost of steel raw materials has leveled the playing field for global competitors, however. “Many of you may think that China is a place with low cost, but I will try to debunk that theory,” he said.

True, he acknowledged, labor represents only 9 percent of the cost of each ton produced in China, vs. 13 percent for a minimill and 26 percent for an integrated mill in the United States. But the Chinese must import most of the iron ore, coke and scrap that go into each melt, pushing their cost of raw materials up to 75 percent of each ton. In comparison, U.S. minimills—also highly dependent on scrap—have a 70 percent raw material cost. Integrated mills have the raw material advantage at about 55 percent.

Summing up labor, materials and energy, Surma estimated that China’s cost to produce a ton of hot-band is now about $382, vs. $372 for a U.S. integrated mill and $361 for a U.S. minimill. China’s labor advantage is more than offset by its raw material disadvantage, even before adding the cost of shipping. “Anyone who says China is a cheap place to make steel is not looking at the numbers,” Surma asserted.

Speaking at FMA’s Toll Processing Conference in Florida last month, Roy Platz, director of marketing for Mittal Steel USA, noted that much is written and said about China’s rapid buildup of steel production, but very little about its growing appetite for steel products. Construction and infrastructure development continues at a phenomenal pace in China, and so does the proliferation of refrigerators, air conditioners and automobiles. “Every dollar of GDP growth in a developing country [such as China] generates much more steel consumption than a dollar of GDP growth in a developed country,” Platz said.

He pointed to a recent World Bank study measuring demand for automobiles in China as a function of per-capita GDP. Today, China has about 24 vehicles per 1,000 people (vs. 760 per 1,000 in the U.S.). By 2015, if its economy grows as projected, it will add another 100 vehicles per 1,000. Given its current population of 1.3 billion, this would put an additional 95 million vehicles into service. Likewise for other consumer durables.

Thus, the question for the future is not whether China will be a predatory exporter, but rather whether it can possibly produce enough steel to meet the long-term needs of its enormous population.

No doubt, China’s willingness to manipulate its currency and violate U.S. antidumping laws makes the Asian giant a trade menace today. But viewed on a longer timeline, the next generation of steel industry executives may see China as the land of opportunity.

Thanks to Surma and Platz for illuminating the subject. The boogeyman in the closet is only scary until you turn the light on.