China's crude steel output is expected to be around 745-755 mt in 2013, or 5-6% higher y/y, according to a market analysis by Deutsche Bank (DB).
The estimated figure represents a considerable deceleration from the previous decade where growth rates averaged around 17% (CAGR), this still represents an absolute increase of about 40mt or nearly 50% of total US steel production.
Given the absolute size of the Chinese steel industry it should come as no surprise that production growth is finally decelerating. In fact the bank expects that this trend will very likely continue and that the next ten years are likely to see growth rates average 1-3%, and this may be optimistic.
In general, DB doesn't expect China's economy requires much more than 800mt/annum of crude steel.
The bank has come to this conclusion by examining the outlook for Fixed Asset Investment (FAI) and comparing the country's consumption intensity trend with that of the US.
FAI appears to be decelerating as China's requirements for further infrastructure build, manufacturing capacity and real estate moderate. Note that equipment used for building infrastructure and real estate projects seem to be contracting – and more severely than that witnessed in late 2008.
Meanwhile, the recent increase in social financing could help to reverse this decline in the near-term, the bank believes that the days of double-digit FAI growth are rapidly coming to a close.
Heavy industry appears to be especially encumbered. The abundance of capital and perception that growth in China would remain elevated for decades has, according to DB estimation, resulted in a potentially sizeable misallocation of capital in certain industries.
Furthermore given the desire to spur growth, employment and tax revenues at the provincial level, regional governments have continued to encourage the growth in capacity in high-employment industries such as steel making.
The deceleration of FAI is expected to negatively impact steel demand, in particular the long-products steel market (re-bar, beams and others).
However, DB expects an offset to appear via growing demand for flat products (coil, plate, etc.). While recent data suggest that Auto/Appliance production is weak, the bank expects that over the next decade production growth in these sectors could improve as the Chinese economy evolves from one driven by FAI and exports to one supported by domestic/consumer spending. While this transition is likely to be somewhat volatile.