The BIG picture – Chinese steel production – the ‘Sydney Harbour Bridge’ index

IMAP Ashley Owen The BIG picture – portfolios perform for the passive & patient

China builds another ‘Sydney Harbour Bridge’ worth of steel every 10 minutes!

If I had to pick a single number that drives Australia’s economic growth, income, wealth, living standards, and overall investment returns so far this century, and for many years yet – it would be: China’s steel production.

Why is this so important?

Chinese steel production is the single most important ingredient in China’s incredible urbanisation and industrialisation that has driven its overall economic growth, and this Chinese growth has been by far the single largest contributor to world economic growth this century. It has especially benefited Australia’s growth in incomes, wealth, and living standards, because most of the iron ore and coking China uses to make steel is imported from Australia.

The wealth has come not only via dividends to Australian shareholders (which they distribute across the economy by spending it, or depositing it in banks which then lend it out), but also as the largest external source of federal and state government tax revenues.

China has been trying desperately to reduce its reliance on our rocks in recent years, but there are few alternative sources of cheap, high grade rocks, and this will probably be the case for many more years to come. In fact, in recent years, Australia has increased its share of Chinese imports from the main competitors - Brazil’s iron ore, and South Africa’s coal. China is hedging its bets here – it has large stakes in all of the major ‘Australian’ producers.

In this chart, the grey bars show China’s steel production in millions of tonnes per year, and the blue line shows the annual growth rate. The red numbers to the right indicate the steel production rate in terms of the equivalent number of Sydney Harbour Bridges worth of steel China builds PER HOUR!

By  Ashley Owen, CFA

Ashley Owen, CFA  Founder & Principal of Owen Analytics

How much steel?

This year, China will make 1 billion tonnes of steel. How much steel is that? 1 billion tons of steel is 26,000 ‘Sydney Harbour Bridges’ worth of steel. By the time you finish reading this story, China will have built the equivalent of one ‘Sydney Harbour Bridge’ worth of steel. That is simply mind-blowing!

One Sydney Harbour Bridge of steel

The Sydney Harbour Bridge contains 38,000 tons of steel (most of which was imported from England because BHP could not produce enough). The bridge took eight years to build and was opened in 1932 in the depths of the 1930s Great Depression.

(The huge cost of building the bridge was one of the main reasons the New South Wales government defaulted on its state debts in 1931, and then the Commonwealth also defaulted after taking over the NSW debt).

Today, China is building the equivalent of one Sydney Harbour Bridge worth of steel every 10 minutes. That is the equivalent of building six Sydney Harbour Bridges every hour, 12 hours per day, 365 days per year.  

That’s 26,000 Sydney Harbour Bridges per year. With that much steel, China builds a lot of bridges, factories, apartment blocks, cars, office towers, airports, military bases, war ships, tanks, etc. 

Why are exports so important to us?

We are told that Australia is a ‘service economy’, and that 70% of our GDP is ‘household consumption’. Mining only employs 2% of the workforce – that’s a rounding error! There are more baristas in Bondi than mine workers in the whole of Australia!

On the surface, yes, we are a ‘service economy’, but that hides the real truth.

Everything we use every day is imported. Look at your desk – everything on it, and in it, is imported. Look around your office or home – everything is imported. Look at what you are wearing, what you drive or ride – everything is imported.

You are reading this story now on a device that is imported, drinking imported coffee or tea, from an imported cup.

True, much of what we eat and drink is grown here, but 100% of the ‘local’ produce is sowed, picked, ploughed, harvested, processed, packaged, stored, refrigerated, cooked, and transported by machinery that is imported.

Likewise, we produce much of our energy locally – from fossil fuels and renewables, but every solar panel, wind turbine, pipe, valve, wire, etc is imported, or made by machinery that is imported. Even with mining - every pick, shovel, truck, drill, dragline, etc is imported.

Our lifestyles and living standards rely completely and utterly on imports, and everything we import must be paid for by foreign exchange earned from exports. By far the largest contributor to our export incomes this century have been exports of iron ore and coal to China.

Our exports to China generate three times the export revenues from our second largest customer, Japan (more on this in a moment).

Ahhh. . .the ‘good old days’ (?)

Australia did have a go at making stuff for a while – but it only survived behind high protection barriers, during the first three quarters of the 20th century. (The Commonwealth of Australia was formed in 1901 on protectionist grounds – the first two Prime Ministers, Edmund Barton and Alfred Deakin were from the ‘Protectionist Party’).

But when the protection barriers were finally removed by the reforms of the 1980s and 1990s, local manufacturing died, and we just went back to digging up rocks for a living! (Wool was a major contributor up until the 1970s, but wool makes up just 1% of exports today).

Fortunately we’ve got a lot of rocks! We didn’t put them there, or invent them, or create them, or manufacture them, or program them, or style them, or make them into anything useful.

We just dig them up, or scrape them off the ground, drag them to the nearest ship, and send them off overseas so other people in other countries can miraculously turn them into useful stuff that we then buy back at thousands of times the price we got for the dumb rocks in the first place!

It’s pure, blind luck that this giant rock we happen to live on in the middle of the ocean, seems to contain a lot of rocks that other people in other countries can magically transform into useful things.

Lucky country indeed! Our exports of raw materials have made Australia the richest country in the world per capita for the past 130 years. And this is still the case today!

Yes, we are a ‘service economy’ - because between the time we sell the dumb raw materials to foreigners, and the time we buy them back, miraculously transformed into useful stuff we need for our lifestyles, we sit around and cut each other’s hair, mow each other’s lawns, make each other’s coffee, teach each other’s kids, buy and sell each other’s (imported) stuff, paint each other’s nails, count each other’s money, etc.

These are all classified as ‘services’ (and all done with imported tools and machinery of course!) 

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Why is steel production more important than ‘GDP’?

China’s steel production is much more important to Australia than Chinese overall ‘GDP’ growth or any other number.

Even when Chinese growth slows or even stops dead, it doesn’t really matter because the main policy tool the Chinese government uses to stimulate activity and employment has been, and still is, infrastructure spending.

That means construction, where the core ingredient is steel, made mainly from iron ore and coal from Australia.

Japan – on repeat

It was the same with Japan in the second half of the 20th century. In the post-WW2 era, Japan was the great ‘emerging market’ that powered global growth, and drove Australia’s prosperity (just like China in the 21st century).

Japan’s incredible construction and industrialisation boom was built with our exports, and Japan was our largest export customer from 1965 onward.

But when Japanese growth hit the wall, stopped dead in 1990, and flat-lined ever since, Japan still remained Australia’s largest export customer for the next 30 years, until it was finally overtaken by China in 2010.

Japan remains our second largest export customer to this day, despite flat-lined economic growth and declining population. What matters is how much they buy from us, not some theoretical ‘GDP’ growth number.  

That will also happen to China in time, but the government will probably still resort to infrastructure and construction to keep the workers employed, quiet and compliant, just like they have done in the past 20 years. 

China’s steel production growth pattern

Chinese steel production grew by an average of 7% per year during the 1980s & 1990s, but then surged to 20% growth per year between 2001 and 2007 following China’s entry into the World Trade Organisation in 2001, which accelerated its booms in manufacturing, exports, and urbanisation.

After the 2008-9 global financial crisis, growth rates in steel production then fell back to around 5% per year, and that includes the massive infrastructure spending boom funded by the post-GFC stimulus program

China’s number one policy tool to stimulate economic activity

Every time there is a slowdown, the government has in the past, and probably will in the future, resort to ramping up construction to boost activity and employment. For example, China’s infrastructure boost in the GFC was what saved Australia’s economy from a deep ‘recession’ (although our local share market and currency fell by more than almost every other country in the GFC).

Chinese growth, and commodities prices, peaked in 2011, but slowed in 2012, so stimulus was ramped up in 2013-4. Growth slowed again in 2015 (and the commodities prices slump on that occasion triggered a string of losses and bankruptcies in oil/gas and mining companies everywhere, resulting in share price falls around the world and a global ‘earnings recession’), so stimulus was ramped up again from early 2016.

Then, in 2018-9 signs emerged of another slowdown in China’s growth (thanks, in part, to Trump’s trade wars) and this showed up in slower growth in steel production. In the 2020 Covid scare, China once again ramped up infrastructure spending, and with it, steel production and iron ore imports from Australia.

China’s steel production peaked at 1.065 billion tonnes in 2020. The government cut production in 2021, partly to reduce carbon emissions, but also at play was the fact that domestic construction activity was already slowing and the government was wary of allowing the smaller, loss-making steel mills to continue to over-produce and rack up more debts.

Production also slowed in 2022 with the collapse of the residential construction sector and the crisis with several major construction groups (Evergrande and others), and the Chinese economy posted a very slow 2.9% for the year, the worst since the 1970s.

But it didn’t matter to us, because China still produced 1 billion tonnes of steel, and our miners posted record profits and dividends. More than half of the combined profits and dividends from the entire 2,200+ companies listed on the ASX came from just three companies – BHP, RIO and FMG, almost entirely from iron ore exports to China.

While the rest of the world posted massive government deficits, we’re heading for a surplus! All thanks to China building another Sydney Harbour Bridge of steel – every 10 minutes!

In early 2023 China announced a grand, but belated ‘re-opening’ after their extended Covid lockdowns. This stalled, so the government is once again having to crank up the infrastructure construction engine.

Steel production has been capped at 1.018 billion tonnes in 2023 to prevent over-production and glut.

Over the past decade, the government has tried to shift the engine of Chinese economic growth away from construction and toward consumer consumption.

This has never worked (for a variety of reasons), so they just revert to plan A: ramp up construction. Much easier and quicker, and better for our rock diggers!   

Longer term outlook

Aside from the regular cyclical rises and falls in construction activity, on a broader level, China’s tremendous boom in industrialisation and urbanisation is slowing because more than half of its population has already been urbanised.

On top of that, the west is ‘de-coupling’ or ‘de-risking’ their supply chains to reduce reliance on imports from China.  

China’s glory days of high overall GDP growth rates are well and truly behind it.  

Even after thousands of empty apartment blocks have been bulldozed across China, there are still countless thousands of empty buildings, and probably dozens of ‘ghost cities’ – all built with our rocks. But it doesn’t really matter.

The government has little choice but to keep on building stuff (and even exporting surplus steel), rather than cut production and risk higher unemployment and unrest.

Just as Australia’s exports to Japan continue to thrive more than 30 years after Japan’s economy flat-lined, China’s demand for raw materials will probably continue to be driven by its enormous military build-up, and by Xi’s ambitious military/trade ‘Belt & Road’ program across Asia, the Pacific, and into Africa and even Europe and Russia.

These are boosting demand for our rocks not only in China, but also in a host of other countries, either as part of China’s Belt & Road construction plan, or to build up defences to counter it. This includes our likely next big export market - India. With our luck, there will be plenty of demand for our dumb rocks for many years to come!

Meanwhile, in the time you took to read this story – China produced another Sydney Harbour Bridge of steel – with our rocks!

About

This article is written by Ashley Owen, CFA and the views expressed are his own.

Ashley is a well known Australian market commentator with over 40 years experience.

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