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Article 30/ 2024
For decades, China’s economy was dependent on a booming real estate sector fuelled by population growth. However, when this bubble in property prices burst, Chinese real estate developers were left with enormous debt and more new housing units than buyers (Moreno, 2023). Property prices have slumped, along with the demand and prices of construction materials. With new construction down by 60% (Hoyle & Jain-Chandra, 2024), the domestic steel market in China is experiencing a slowdown. This shift has impacted the domestic steel market, pushing China, the world's largest producer and exporter of steel, to adjust its strategies. (Kolisnichenko, 2024). With the steel industry being a crucial part of China's economy, understanding these new strategies is vital for global economic stakeholders.
This paper aims to analyse China's new strategy for steel production and export, particularly in relation to the Belt and Road Initiative (BRI), and the impact of these changes on India. Focusing on Indian steel imports and the potential harm from Chinese steel dumping. It explores the growth in India's steel demand and how much of this demand is met by Indian steelmakers, addressing the potential threat posed by China's overseas steel expansion.
Current Trends in China’s Steel Production
The steel industry in China was historically not export-oriented. However, in the last few years, we have seen an increasing trend of exports in this sector (Song, 2023). The World Steel Association, in its Short-Range Outlook steel demand forecast for 2024 and 2025, forecasts that the demand for steel in China is expected to reduce by 1% by 2025. China’s steel production capacity continued to expand in 2023, reaching 1.173 billion tons. This represents a 2% year-on-year increase from 2022, continuing an upward trend in capacity. The average capacity utilisation in 2023 was 87% (Kolisnichenko, 2024). According to a report by the China Iron and Steel Association (CISA) (2024), China's steel exports rose year-on-year by 36.2% in 2023, while average steel export prices fell by 32.7%. The slide of the yuan against the US dollar (Lee, 2023) and the Chinese government’s handsome subsidies (Ambaw & Thangavelu, 2022) also contribute to the artificially low prices that producers from other countries are unable to compete with. The overcapacity of the Chinese steel industry has been well proven (Xu & Liu, 2018). The Chinese government is expected to give a centralised limit order to steelmaking and is undertaking studies to do so; however, we haven't seen the actual policy implemented as of June 2024 since the priority for the Chinese authorities is to achieve the GDP growth target of 5% (Ranjann, 2023). This requires keeping production performance at a high level.
China’s Belt and Road Initiative is another answer to fulfil Chinese steel companies’ thirst for expansion. Chinese steel companies like Tsingshan Holding and Delong Holding have already set up mills in different parts of the world, but mainly in other Southeast Asian countries (Zhang & Bartholomew, 2019). These companies are setting up steel mills in BRI stronghold countries through acquisitions, mergers, and forming subsidiaries to facilitate infrastructure projects there and capitalise on more favourable conditions. Many other countries, especially those where BRI projects have been started, are welcoming foreign investments and setting up Chinese plants. Zou et al. (2021) conclude that China's infrastructure investments under the Belt and Road Initiative (BRI) are a strategic response to the “New Normal” for sustaining economic growth through structural transformation.
How much is India importing? Why?
India’s plans to industrialise, backed by government spending on infrastructure, building, and construction, accelerate India’s steel demand. India’s investments in the Atmanibhar Bharat Scheme and Production- Linked Incentives (PLI) represent India's aspirations to become a manufacturing superpower (Aggarwal, 2024). Even According to the World Steel Association’s short-range projections, India has emerged as the strongest driver of steel demand growth since 2021, and its projections suggest an 8% growth in domestic demand over 2024 and 2025, driven by continued growth in all steel-using sectors and especially by continued strong growth in infrastructure investments. In 2025, steel demand in India is projected to be 156 million tonnes, almost 70 million metric tons higher than in 2020.
India’s primary import sources are China, South Korea, Japan, the United States, and Indonesia, according to Steel Import Management System (SIMS) data (2019-2024). Although China has topped the list for the past few years, steel demand in Japan and South Korea is also dropping since they have become mature economies, according to World Steel Association data. According to the CISA report (2024), even though Chinese steel exports to most regions declined, exports to India increased month-on-month consistently due to high demand from India. With a 38.1% increase in Indian steel imports compared to the last financial year, India became a net importer in FY 2023–24. India's finished steel exports were at 7.5 million metric tons last financial year, which is an 11.5% increase from last year; thus, Indian demand is increasing. (“India Turns Net Importer of Finished Steel in FY 2023–24, Data Shows,” 2024). Chinese shipments are up by nearly 50% year-on-year (Law, 2024a). This is amidst China overtaking the United States to become its largest trading partner (Siow & Siow, 2024).
China’s primary exports to India for the past 4 years has been of flat rolled steel according to TradeMap data, this has clearly also been an issue for India for a long time since in 2015, an anti-dumping duty was levied on imports of various hot-rolled flat stainless steel products for five years and a provisional duty of 20% was imposed on certain hot-rolled flat steel products (Sahay, 2024). This lack of investment into infrastructure to produce flat rolled products leaves India vulnerable to cheap Chinese imports. India’s lag in manufacturing good quality flat steel products is reflected in the fact that alloyed flats are the only category that has experienced a consistent year-on-year increase in imports apart from steel scrap according to Ministry of Steel’s Annual Report data (2023). Even Though domestic production has increased, a lot of the production is also exported to Europe and North America. Thus, investment in expanding and improving the quality of flat rolled steel is pertinent.
However, tariffs, quotas, or other barriers to trade on steel imports might not be the best solution for India to protect its interests. This is due to the fact that steel prices will then rise for consumers of steel, which include construction and infrastructure, automobiles, machinery manufacturing, and other related industries. In turn, increasing prices lead to increased operating costs for the users. Therefore, it is important to manage the interests of both manufacturers and users.
Challenges to India
Data from SIMS states that for 51.1% of India’s imports in 2023, Indian alternatives were available. Despite the popular belief that cost is the main driver of steel imports, quality was the foremost concern mentioned by Indian importers when importing, with price only being second, according to SIMS data. Quality issues within India's domestic steel industry need to be addressed to reduce reliance on imports. Failure to do so could result in sustained import levels, impacting the local industry and economic stability.
Iron ore is the key raw material for manufacturing steel. A lot of Indian iron ore, especially the low-grade ore, which is primarily used by smaller-scale Indian steel manufacturers, has been exported to Chinese steel makers since China is the biggest export destination for Indian iron ore. This causes a rise in the price of raw materials for local manufacturers as well. These unfair trade practices in strategically important sectors like iron and steel should raise concerns for the Indian authorities. After introducing export duties in May 2022, they were slashed in November 2022 since iron-ore exports reached a near-zero point. The export duty on the export of lumpy iron ore and fines with an iron content of less than 58% has been reduced from 50% to 0%, and the export duty rates for iron ore with an iron content of more than 58% have been reduced from 50% to 30% (Ministry of Finance, 2022). The iron-ore mining industry claimed that the duty had an adverse effect on their margins and foreign markets.
Most of the coking coal produced domestically in the country had a very high ash content, making it redundant in the manufacture of steel. Accordingly, the Indian steel industry has been largely dependent on imported coking coal, which once again drives up the prices of Indian steelmakers. This pressure might compel firms to cut costs, potentially compromising on quality. To remain competitive and manage expenses, some manufacturers could opt for inferior raw materials or reduce investments in quality control measures, leading to lower-quality steel products. ‘Green Steel’, or producing steel by using hydrogen as an alternative for coking coal, is not a realistic aspiration since it requires high-grade iron ore (Nicholas & Basirat, 2022); however, most of India’s iron ore is either low or medium grade according to data from Indian Bureau of Mines(2023). Currently, India uses large reserves of lower quality coal that it gasifies in order to make direct reduced iron, which can, in turn, be used to manufacture steel without the need for imported coking coal. However, this coal-based direct reduction can cause a lot more emissions and hence incentivising such a process goes against India’s long-term goals to reduce the emissions produced by its steel industry.
As the world seems to be looking toward India to drive steel demand growth, it is important to keep in mind the source of the optimism. Mr. Jayanta Roy, Senior Vice President & Group Head, of Corporate Sector Ratings, ICRA, stated that “in the six-month period between June and November of 2023, as the government accelerated infrastructure spending ahead of the Union Elections, domestic steel demand grew at a brisk pace of around 16% over the same period of last fiscal. However, the prints for December 2023 and January 2024 reveal a marked slowdown in consumption growth to just 6.5%,” according to an ICRA press release (2024). It is also possible that the surge in imports and high demand in India in FY24 is due to a pre-election surge.
How is China's new strategy for steel impacting India?
Chinese steel manufacturers are incentivized to expand their footprint overseas, hoping that BRI will be the answer to domestic steel overcapacity. Xu and Liu (2018) conclude that China's steel industry faces severe overcapacity not due to periodic or local surplus but due to investment outpacing market demand and a recession in the construction industry. Overcapacity is more rooted in domestic macroeconomic imbalances. Similarly, Freeman (2020) argues that “the global dominance of China in infrastructure investment compared to regions where the BRI is active indicates these regions will have difficulty playing a role comparable to domestic factors, despite their enormous development needs.”. Hence, BRI would play only a marginal role in resolving domestic overcapacity. Therefore, China will continue to fuel the global steel overcapacity crisis, both directly and indirectly.
With steel demand plummeting in the rest of the world due to high inflation in Europe and North America, as well as heavy tariffs imposed by these countries on Chinese imports, India has become an ideal destination for Chinese steel. The Secretary General of the Southeast Asia Institute for Iron and Steel (2024) emphasised the current overcapacity and the future situation if the proposed projects are completed. Thus, in line with existing literature, if BRI investments fall short of resolving China's domestic overcapacity, India will likely face increased steel dumping, not only from China but also from ASEAN nations benefiting from Chinese investments. This dumping could exacerbate the competitive pressures on India's steel industry, and local manufacturers may struggle to compete, leading to economic and strategic challenges for the domestic industry.
Vietnam, which was among the top five buyers of Indian steel until FY22, is now a key seller of steel. “Chinese steel is being re-routed into India through Vietnam, while Indian exporters are unable to compete in these markets with China, where the selling price of steel was less than their cost of production,” a Ministry of Steel official said (Law, 2024b). Thereby, even targeted trade barriers against China may prove ineffective due to the issue of transshipment, where goods are rerouted through intermediary countries to avoid tariffs. This practice complicates enforcement and allows Chinese steel to enter markets under different origins, circumventing direct trade restrictions. Tariff evasion thus becomes a significant concern, undermining efforts to protect domestic industries and maintain fair competition.
As China establishes steel production hubs abroad, India might find itself increasingly dependent on Chinese steel, directly or indirectly, for its infrastructure projects. This dependency can pose risks related to supply chain disruptions and political tensions, affecting the stability of India's construction and manufacturing sectors. That is not to say we need to abandon importing Chinese steel altogether, since imports are crucial fuel for India’s infrastructural growth and to build India’s production capacity. In a time where national security is closely linked with economic diversification, diversification, and de-risking are essential to both economic resiliency and creating some sort of leverage over a China that is just not predictable or stable in its foreign policy approaches. Diversification also gets tricky in an environment where Chinese steel companies are expanding to other countries. To effectively diversify, India needs a multifaceted strategy.
Conclusion
India's growing reliance on Chinese steel presents both opportunities and challenges. While imports are essential for sustaining India's infrastructural growth, this dependency can lead to significant risks, including supply chain disruptions and increased vulnerability to geopolitical tensions. For example, North America and Europe’s tariffs against China could mean that India could leverage them as destinations for India's exports, as steel exports to Europe hit a five-year high in FY24 (Law, 2024b). Moreover, this also presents an opportunity for Indian steelmakers to get the support and resources they need to upgrade their facilities and innovate in order to compete domestically and internationally.
Managing the interests of both steel manufacturers and consumers is crucial. Import tariffs may protect local producers but increase costs for end-users, affecting sectors like construction and manufacturing. India’s existing policies of research and development spending and upgradation of steel plants are lagging behind the international trends of incorporating IOT and blockchain technologies into production processes as per Industry 4.0. Therefore, India must adopt a balanced approach, promoting local production quality and innovation while maintaining a stable supply of affordable steel imports. By fostering industry advancements and mitigating dependency risks, India can enhance its steel sector's resilience and global competitiveness.
Despite the surge in imports fuelled by India's infrastructural demands, quality concerns persist with domestic steel. Exporting low-grade iron ore to China raises raw material costs for local manufacturers, leading to potential cost-cutting and compromised quality. Even targeted trade barriers against China may be ineffective due to transshipment and tariff evasion. As China expands steel production abroad, India's reliance on Chinese steel poses strategic risks. Therefore, India must balance leveraging these imports while diversifying sources to ensure economic resiliency and strategic positioning in the global steel market.
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