Chinese steelmakers will have to remain flexible if they want
to stay competitive, according to John Lichtenstein, managing
director of Accenture Plcs global metals industry
has slowed in recent years since the government backpedaled on
steel sector investments, causing producers to face tepid
demand and squeezed margins. While more stability was expected
after the changeover in power earlier this year, the results
have been less than overwhelming.
"When the market first
slowed down, people attributed it to a number of factors,
including the impending leadership change and uncertainty about
that and the time needed to ramp up to the latest five-year
plan, which was not yet fully in force," Lichtenstein told
AMM in a recent interview. "In general, there was the
hope and expectation growth would get back on track."
However, it has become
apparent in recent months that the leadership will not take
"strong actions" to stimulate steel consumption, and will
instead maintain a more balanced approach when dealing with
economic growth, he said.
"To some extent, since
the first financial crisis China has overbuilt or at least
pre-built a great deal of infrastructure," Lichtenstein said.
"They built dozens of airports but didnt have the
passengers or planes for them. They greatly expanded the rail
system, but ridership has been low as not enough people are
able to afford to use it, with the result that the rail system
is now losing money. There is (growing) recognition that in the
current economic conditions, throwing more money at
infrastructure brings with it declining capital
U.S. interests have
claimed that Chinese overcapacity is causing a ballooning
export market. But while domestic players have tried to combat
Chinese imports by filing trade actions and pushing legislation
on Capitol Hill, Lichtenstein said that its effects are only
"China will never do
something because its pressured to do so," he said. "I
think that, potentially, the turning point comes when the costs
to subsidize losses, maintain all this capacity ... reaches a
point where other costs and considerations begin to outweigh.
When enough problems accumulatethat could tip the needle
on strong action."
But on top of
financial pressure, increasing environmental regulation may
curb steel production. China, the worlds largest emitter
of carbon dioxide, has pledged to address the countrys
air pollution problems, an effort some say may have adverse
affects on the steelmaking industry.
heightened sensitivity to public views around environment and
resources," Lichtenstein said, citing cases where public outcry
against chemical plants led to cancellations of proposed
projects. "We havent seen that in steel, but I think
thats one of the factors that the central government
tries to weigh. Any plant that doesnt follow the
standards will be shut down. I think well be seeing more
and more of that happening."
But ultimately, the
problem within China is not so much one of initiative, but
rather one of priority.
"Within the central
governments efforts to manage overall economic growth and
maintain social stability, there are a whole lot of different
and sometimes competing metrics and objectives," he said. GDP
growth and maintaining social order requires employment, but
closing steel plants to meet energy or environmental targets
negatively impacts GDP, employment and social order. "That
becomes a trump card," Lichtenstein said. "At the end of the
day, what concerns the leadership the most is the loss of