HIGHLIGHTS
Eyes being closer to growth markets, such as Southeast Asia
Removal of domestic overcapacity boosting profit margins
Privately-owned Chinese steelmaker Jingye Group's move to buy British Steel provides further evidence of Chinese steel companies expanding their footprints overseas.
Following the acquisition of British Steel with its 3 million mt/year of capacity, Chinese steelmakers will own eight overseas mills with a total capacity of 14.2 million mt/year.
S&P Global Platts estimates that a further 42.7 million mt/year of new overseas crude steel capacity, involving nine projects that are fully or partly-owned by Chinese companies, is also in the pipeline.
Chinese steelmakers have sped up their plans for overseas capacity expansion since 2017 in tandem with largely improved steel profit margins as a result of overcapacity elimination in China.
Setting up steel mills overseas might be a good choice for Chinese steelmakers to expand their global steel businesses without raising trade tensions, one industry analyst said.
Steel companies feel constrained by ongoing production curtailments and a nominal ban on new net capacity in China. They also want to be closer to customers in growth markets, such as Southeast Asia where lower-cost manufacturing is surging, at a time when domestic demand and consumption have possibly peaked.
Almost half of the 14.2 million mt/year of existing overseas capacity run by Chinese mills is located in Southeast Asia.
Five of the nine new projects, accounting for 35.5 million mt/year of crude steel capacity, will also be built in Southeast Asia.
Two Chinese steelmakers - Tsingshan Holding and Delong Holding - along with PT Indonesia Morowali Industrial Park, are building the 3.5 million mt/year capacity Dexin Steel Indonesia operation, which will produce mainly bar and wire rod.
Wen'an Iron & Steel, headquartered in northern China's Hebei province, is preparing to build an integrated steel mill in Malaysia, which is designed to ultimately have 10 million mt/year of crude steel capacity.
The seven other overseas integrated steel mills in the planning stage have a total crude steel capacity of 29.2 million mt/year and were respectively initiated by Hebei Iron & Steel, Taiyuan Iron & Steel Group, Panhua Group, Tsingshan Holding Group, Kunming Iron & Steel and Jiangsu Huaiye Science and Technology Development. Four were planned in 2018, two in 2017 and one so far in 2019.
Panhua Group said in September it could build a $3.5 billion integrated steel plant in the Philippines. This could potentially be a 10 million mt/year capacity operation.
In August, Shanghai-listed Baosteel, a subsidiary of Baowu Group, said it was considering overseas locations for its first integrated steel mill abroad. The company said internationalization would be crucial for Baowu Group's development.
The most recent report from the South East Asia Iron & Steel Institute noted that Chinese investment in ASEAN steel assets had "surged" in recent years. Hebei Iron & Steel, Jianlong Group and Tsingshan Iron & Steel could contribute to another 45 million mt/year of new crude steel capacity if their plans are realized, SEASI said.
Since China shut down some 150 million mt/year of capacity under the country's supply-side reform agenda, Chinese mills' debt-to-asset ratio has declined and profitability has improved, which has strengthened Chinese mills' financing ability, Chinese steel market sources said.
In view of the long time it takes to construct new projects and increased competition in overseas markets, having a strong financial foundation was vital for successful overseas investment, they said. Further, there have been a number of international companies up for sale at relatively low prices, with governments keen to avoid mass job losses caused by steel mills closing down.
Chinese investment could help drive demand for raw materials in ASEAN, as most of the projects are blast furnace/basic oxygen furnace operations. Iron ore producers such as BHP and Rio Tinto regularly talk up the potential of Southeast Asia as a growing market, and new operations in the region could help offset waning demand for iron ore in China.
Source: S&P Platts