I want to discuss a very important topic that highly relates to our discussion the past few days about the expanding international coal market: steel. Coal and steel talk go hand in hand. Global steel production is dependent on coal: 70% of the steel produced today uses coal. Metallurgical coal – or coking coal – is a vital ingredient in the steel making process. World crude steel production was 1.4 billion tonnes in 2010. Around 721 million tonnes of coking coal was used in the production of steel. The resilience of China’s steel production in the face of the recession indicates that the nation’s met coal demand is a secular growth trend, not a cyclical one. China is constructing like nobody’s business, an expected 50 New Yorks will be erected from 2008-2028 – an equivalent of 50,000 skyscrapers!
This will require loads of steel, which in turn means loads of coking coal. China is the principal driver of global met coal demand. The USA, for instance, produces only 13% of China’s steel output, which now accounts for nearly half of global production. In addition, steelmakers in the USA tend to rely more heavily on electric arc furnaces that use scrap metal, and less coal, in the process of making steel. China’s steel production over the past few years is particularly staggering since the other countries have essentially flatlined due to a sunken economy and an overall lack of growth. China’s monthly steel outputs have doubled since 2006!
Although reliable statistics are notoriously hard to come across in China, China Knowledge reports that the country’s demand for coking coal will hit 569 million tonnes in 2011 and there will be 56 million tonnes of insufficiency between domestic supply and demand. Looking forward, the enormous potential for steel consumption in China, and India as well, lies in the fact that the country’s per capita rate is still very low, when compared to the developed nations on Earth. India is clearly a developing nation, but China lies somewhere in between.
China’s GDP per capita is less than $7,000, against $45,000 for the USA and $30,000 for Europe. India’s GDP per capita is less than $3,000. Indeed, on all energy fronts, “ChIndia” stands ready to tilt the world. Mining giant BHP Billiton sees fast-developing China and India contributing to around 68% of demand growth for met coal between 2010 and 2025. BHP also expects China to continue to build larger blast furnaces, which require higher quality coke, and therefore better coking coal.
One of the more important points when it comes to steel demand is the amount of money spent on urban infrastructure. There is a rapid urbanization that is occurring in China especially that will have major repercussions for the rest of the world. According to McKinsey & Company, China annually spends about $116 per capita on urban infrastructure development, while India spends just $17. This is important because, according to the CIA World Factbook, China (47%) is more urbanized than India (30%), but India (2.4% annual rate change) is actually urbanizing faster than China (2.3% annual rate of change). By comparison, the USA is urbanizing at a rate of 1.2%, Japan is at 0.2%, and Germany is 0%. India faces enormous societal problems if the country does not expand its spending on urbanization, most notably the desperate need for more housing. In contrast, a cornerstone of China’s urbanization strategy has been the hukou, or household registration system to control migration by channeling migrants to small- or medium-sized cities. There are slums in China, but not as many as would normally be the case.
Either way, this urbanization in “ChIndia” will increase per capita incomes and raise energy consumption. The World Bank, for instance, reports that urban Chinese consume 3.6 times more energy than their rural counterparts. While the developed Asian economies (Japan and South Korea) saw a drastic decrease in steel consumption after the 2008 global economic recession, China’s steel demand has noticeably not relinquished its surge.