China’s soaring demand for steel is raising hopes of a new and profitable era for this long-suffering global industry. Aided by regional consolidation among European and US producers, the worldwide outlook for profits is positive. Moreover, steel companies listed on the world’s major stock exchanges started 2004 with a total market value that was up 77 percent from the levels of the previous year.1
Celebrations may be premature, however. Our analysis suggests that most of China’s flat-steel demand will eventually be satisfied by additional domestic capacity—hardly a long-term solution to the fundamental problem of worldwide overcapacity. In fact, chances are that the high-cost steelmakers of Japan, the United States, and Western Europe, will be worse off if they maintain their capacity or expand to take advantage of the Chinese boom. Moreover, if China’s economic growth slows, the country could become a net exporter, with devastating effects.
Our study examined the impact of Chinese trends on the global $200 billion-a-year flat-steel industry through 2010. Its general conclusions apply not only to flat steel (used to make car bodies, among other things) but also to the industry’s other segment, long steel (used, for instance, in construction).2 Flat steel is...