What does China’s marginal economic slowdown really mean in practical terms? For a growing number of industries much more is at stake than a slowing of double digit sales increases in China’s domestic market. For industries in which China has already established its global leadership – as both a market and as a producer – the coming tsunami will challenge swamp established assumptions.
With Chinese domestic growth moderating – and construction cooling in particular – a 73% hike in Chinese steel exports has begun rippling through the global economy. While today’s headlines focus on the slight decline in China’s overall GDP growth, the industry- and sector-specific fall out is where radical structural change occurs.
China’s leading position as the world’s largest consumer and producer of steel means that these swings have dramatic impacts on competing producers as well as end-user industries and all those in the value chain. So far, the direct impact has not yet shown up in massive US steel imports from China. Instead, Chinese exports to other emerging markets, particularly in Asia, have disrupted overall global supply/demand balances. Hence the full impact of falling Chinese domestic prices (see graph below courtesy of the Financial Times and Bloomberg) have yet to hit. But they will. Falling US steel prices and a surge in imports will inevitably be followed by mounting trade friction.
Under a reform-oriented leadership, these economic realities may well accelerate further consolidation of the Chinese steel industry. The least efficient mills will be shuttered and salvageable assets will be shifted to better managed firms and upgraded. But so to will marginal producers in other markets. And China’s position as the world’s leading steel producer will strengthen.
How much of today’s enthusiasm for the revival of US manufacturing, predicated on low-cost (i.e. underpriced) energy, will prove sustainable when China’s much larger demand and product capacities create shift in those industries?