At the Abu Dhabi-China Economic Forum last week, representatives of the two nations vowed to move forward from their strong oil bonding to cover steel, aluminum and infrastructure sectors.

In an oversupplied global steel market, China desperately needs new frontiers to off-load its steel products. The strong growth in steel exports for the first quarter this year, is now nearing its peak, putting the world's largest producer at a crossroads, according to the China Iron & Steel Association.

The complexities of the Chinese iron ore and steel markets were discussed at the seventh Shanghai Derivatives Market Forum organised by the Shanghai Futures Exchange last month. Experts said China will find it hard to sustain itself in the saturated international steel markets. Production costs will continue to rise, even as sales prices of steel products fall since mid-April.

Demand will remain a tough call in the second half of 2010. According to a May report by Helen Henton, Head of Commodity Research Standard Chartered Bank, UK, China's macroeconomic growth is expected to slow down in the second half and consequently, the steel industry will face challenges from slowing demand and high raw-material costs.

While foreign analysts remain bullish on China's ability to consume more steel in the long term, they advise caution in the second half. Participants at the Shanghai Derivatives Forum also felt that China's steel demand will continue to be primarily driven by investment including in infrastructure and real estate for several years to come.

In the long haul, China's urbanisation remains a veritable treasure trove. Its rate has already risen to 46.6 per cent versus 57 per cent globally. This will support inelastic demand for steel in the long term. Central-western China, where the government is targeting an urbanisation rate to 48 per cent by 2015 from 40 per cent at present, will be the focus of a massive development push.

The shipbuilding industry is also proving to be a steel saver. Chinese shipyards almost doubled production in the first four months of the year as the end of the credit crunch and rebounding global trade revived demand for new ships.

China State Shipbuilding Corporation, a state-owned company, has won orders of about 40 million deadweight tons through 2012, a huge jump over 2009. A revival in shipbuilding has helped bolster steel prices.

Tough second half

However, the downside is, the Chinese government has limited loans for third-home purchases and tightened requirements to dampen the property sector.

This proved to dampen steel sentiments. Also, as analysts point out, the second half will be tougher for China's steel trade as the situation in the rest of the world has improved significantly since a year ago.

Baosteel Group Corporation the largest iron and steel conglomerate in China, said last month steelmakers may face a "difficult" second half as measures to curb speculation in the property market may trim demand.

Henton says in her report that the correlation between commodity markets and equity market performance has intensified this year and this will continue to be the case.

China steel prices slumped last week in an uncertain market. Traders fretted about long-term demand after a number of medium-sized steel mills decided to make production cuts going into June. Industry consultancy Mysteel said construction steel prices in Shanghai were $555 per tonne mid-week, down 2 per cent from the previous week.

Benchmark steel prices in China have fallen 8.8 per cent from an 18-month high on April 15. However, base metal analysts are not fretting. "We believe the current correction is an important reality check on the strength of the demand recovery going forward and will provide a firmer footing for commodity markets," writes Henton.

In this tough scenario, the Middle East region should be one of the most attractive areas for investment for China's steel industry sector.

Half of the steel consumed in the Gulf, estimated at 40 million tons in 2009, is imported for its booming construction sector.

 

The writer is a freelance journalist based in China