How China can keep urbanising with flat steel demand | FT Alphaville

How China can keep urbanising with flat steel demand

Even if you don’t buy the once-popular assertion that China needs more of just about everything to meet its growing economy, zero growth in steel consumption might seem pessimistic, given that rural Chinese are still moving to cities in large numbers.

Nomura analysts Matthew Cross and Ivan Lee looked at China’s urbanisation rate and concluded that it can keep progressing at its current pace for years without needing an increased rate of steel consumption. In fact, they argue that China’s annual steel needs won’t increase at all in 2012 and 2013 — and that’s with new government stimulus.

(This is the same pair who we think convincingly argued against using per capita growth in metals consumption; their urbanisation research is a few months old now but we found it a very interesting read anyway.)

Here is an outline of their urbanisation/steel scenario:

1) Roughly 50 per cent of China’s population is now urbanised.

2) Urbanisation rates will max out at about 68 per cent (That’s made up of 75 per cent in the country’s east, 65 per cent in the centre, and 60 per cent in the west. For the sake of comparison, an influential McKinsey Global Institute paper projected that China would be 64 per cent urbanised by 2025).

3) That means another 230m people will be urbanised.

4) At the current urbanisation rate (17m – 19m people a year) that will take 12 to 13 years.

5) It took between 17 and 23 tonnes of steel to urbanise one person between 2000 and 2010. (The range depends on whether you look at a five-year or 10-year average; and the figure assumes all steel went to urbanisation, although this overstates the steel demands of urbanisation.)

So, how much steel will that require, and how fast? Here’s what Cross and Lee say (emphasis ours):

On this basis, we estimate at the historical rate of steel consumption, China will require another 4.0-5.3bn tonnes of steel before the urbanisation process is largely complete (230mn people x 17-23 tonnes).

Assuming annual steel consumption of 655mtpa (run rate for 2011, and our forecast for 2011-13), we estimate China will consume 4.0-5.3bn tonnes of steel over the next 6-8 years. This is significantly faster than the 12-13 years it is likely to take for these people to urbanise. The implied annual rate of steel demand from urbanisation is between 289mt (17mn people pa x 17 tonnes per person) and 437mt (19mn people pa x 23 tonnes per person).

In the 12-13 years needed to urbanise 230mn people, China will consume 7.8-8.5bn tonnes, assuming 655mtpa of consumption (flat). This is at least 60% more steel than our estimate of 4-5.3bn required. Alternatively, at the current rate of urbanisation, China would use 60% more steel per urbanised person in the 2010-2020 decade than it did in the 2000-2010 decade. At this rate, we would expect China to consume more steel in the 2011-2015 period than in the period from 2000 to 2010.

There’s a key point here: even with flat levels of steel consumption — that is, no growth — all this future urbanisation would still be much more steel-intensive, per person, than in the 2000 – 2010 decade.

Nomura’s other big argument is that year-on-year growth is a misconception, anyway. Cross and Lee say that steel consumption should instead be measured in terms of cumulative consumption. They present this graph:

China US Japan steel consumption curves compared - Nomura

Never mind how big China is — the rate of change, not just the consumption level, is off the charts. Historically, steel consumption growth does not continue in a straight line along with GDP growth:

Thinking in terms of tonnes acknowledges that at some point China’s annual steel consumption will be “large enough” to support its economy’s requirements. It also recognises that economic growth can occur without continually increasing steel consumption. The following figures compare the annual and cumulative steel consumption patterns of the US and Japan with their respective GDP per capita through time. We notice that annual steel consumption peaked at relatively low levels of GDP per capita. And despite reaching a peak in annual consumption, cumulative steel consumption continued to grow steadily.

Here’s the US and Japanese paths, for comparison:

US cumulative steel consumption - Nomura

Japan's cumulative steel consumption - Nomoura

In fact without further stimulus to offset the fading of the 2008 measures, they say, China’s natural rate of steel consumption would fall, in plain year-on-year growth terms. The only thing stopping it going negative is that the central government won’t let it.

[More in the usual place.]

Related links:
Real estate won’t be supporting China’s steel demand much longer – FT Alphaville
World’s changed, man! World’s changed! China edition – FT Alphaville
Urban (commentary) combat in China – FT Alphaville