ORLANDO, Fla. — A slowdown in Chinese steel demand and an increase in the nation’s ferrous scrap reserves could rock U.S. markets in the next decade, depending on Chinese government policy, according to World Steel Dynamics Inc. (WSD).

Steel demand in China is likely to slow as large infrastructure investments tail off in the next 10 years, Philipp Englin, chief executive officer of Englewood Cliffs, N.J.-based WSD, told attendees at the American Wire Producers Association (AWPA) annual meeting in Orlando, Fla.

"The great question with China as we look ahead is, Does steel demand really continue to grow or is there a point when this machine simply becomes unsustainable?" Englin said. "I’m a believer that at some point they could simply hit the wall and steel demand will outright decline in China."

Investment in fixed assets—such as infrastructure, housing and construction—is the primary driver behind Chinese steel demand, with as much as 90 percent of China’s steel output in 2012 aimed at those end markets, Englin said. China, the world’s largest steelmaker, produced 716.54 million tonnes of crude steel last year (amm.com, Jan. 18).

But fixed-asset investment will slow in the next few years as the effects of China’s massive post-recession investments in infrastructure wear off. "We’re all aware that China deployed a massive stimulus program, and the bulk of that stimulus program went into steel-intensive-type projects (like) infrastructure," Englin said. "(But) what you’ve ultimately created is a bubble. ... (Now) they’re trying to reconfigure the economy away from fixed-asset investment of ‘build, build, build’ to ‘Let’s consume a little more.’"

China’s automotive industry—the world’s largest in terms of production—demands 50 million tonnes of China’s steel output, which is a "paltry fraction of the total," Englin said, and increased consumer steel consumption will not make up for a decline in infrastructure and other development.

The effect of lower Chinese steel demand on the U.S. market remains uncertain. China might choose to ship its excess steel to the United States during the next decade, Englin said, or the government could restrict exports.

"You could see an increase in exports of certain steel-related products, for example," Englin told AMM on the sidelines of the AWPA meeting. "There’s a chance that exports will go up. ... Exports out of China will be a function of many things; obviously, market forces will be one of them. Government policy will play a bigger role, I would think."

Chinese steel exports grew faster than the rate of production in 2012 compared with the previous year, with total steel output up 7.7 percent and exports up 13.5 percent, according to Jim Kerkvliet, vice president of commercial sales at Gerdau Long Steel North America. "We start to see that where the Chinese economy is slowing, we start to see that there’s export growth from China," he said during a presentation at the meeting.

Excess ferrous scrap supply—as much as 150 million tonnes of excess scrap in 2025 and double that in 2035, according to one data model, Englin said—also could affect U.S. markets if the Chinese government does not impose export restrictions.

Although steel normally has a life cycle of 10 to 40 years before it is recycled and enters the scrap market, Chinese steel could be recycled much faster, Englin said. Fast-deteriorating roads and newly constructed buildings that are collapsing point to Chinese scrap entering the market more quickly than the country can expand its electric-arc furnace (EF) capabilities.

"The quality of the infrastructure and the quality of non-consumption-oriented steel that’s been consumed in China isn’t that high," Englin said. "It’s sort of proportionate to the consumer goods you get out of China: They’re kind of cheap and shoddy on average."

If China does significantly expand its EF capabilities, total excess scrap in 2025 could be around 70 million tonnes, but without a restriction on scrap exports the excess could have a dramatic effect on global markets.

Letting Chinese scrap "flow freely ... would be a revolutionary event (in the United States) if that would happen," a wire fabricator said during a question-and-answer session.

The combination of reduced steel demand in China as well as increased scrap reserves could also greatly reduce iron ore demand, Englin said. "It takes some really gutsy forward thinking on the part of the industry today to capitalize on a changing competitive landscape a decade from now."