The real story of how China took over the world of metals

The fact that China is the world’s largest producer of steel and many other metals is by now one of those ordinary pieces of background information, so unremarkable that is mentioned in passing in news stories without further explanation. Yet it is still a fairly amazing fact, and I suspect that most people, if asked to explain how it happened, would not be able to come up with more than a mix of “China is big,” “government subsidies” and some hand-waving.

The real story is much more interesting, and is well told by my friend Michael Komesaroff in a new paper published by CSIS: “Make the Foreign Serve China: How Foreign Science and Technology Helped China Dominate Global Metallurgical Industries.” The details are the heart of the tale, so it’s hard to summarize, but here are some excerpts to give a flavor of the conclusions:

Since 1978, China’s metallurgical industries have undergone rapid modernization, and they are now characterized by facilities that are among the largest and most technically advanced in the world. For example, in 2015, China turned out 31.67 mt of primary aluminum, accounting for 54.7 percent of world production. In 1990, the average size of China’s aluminum smelters was 22,000 tons per annum (tpa), much smaller than the 190,000 tpa that was then the average for smelters outside China. In 2015, the average Chinese smelter was rated at 330,000 tpa, much larger than the rest of the world where the average was 260,000 tpa. Currently six of the world’s 11 largest aluminum smelters, including the world’s two biggest, are in China, and some of them are equipped with advanced technology that has yet to be used on a commercial scale outside the country. … The examples of aluminum and steel are replicated in many other metallurgical sectors, including magnesium, gold, bismuth, cadmium, copper, lead, nickel, stainless steel, rare-earth elements, and zinc.

china-world-steel

In most cases the rapid transformation of China’s metallurgical industries can be traced to technology acquired in the 1980s and 1990s when Chinese state-owned enterprises (SOEs) purchased obsolete plants from failing foreign peers. The plants were dismantled and transported to China for reassembly. The underlying technology for these facilities was more efficient than what was then being used in China, but from a foreign perspective the plants were small and the technology was usually relatively old and not rated as the world’s best practice. However, for China, the purchase of transplanted foreign facilities was a cost-effective means of growing their understanding of more-advanced metallurgical technologies and this strategy contributed to the country’s emergence as the global leader in the production of most metals.

The specific strategy adopted by China when rebuilding the transplanted facilities was to confine any modifications to those necessary to simplify the process and adapt them to Chinese conditions. Having adapted the imported plants, engineers set out to fully understand the technology before initiating a series of continual incremental enhancements that improved performance. The continual improvements were helped by a rapidly expanding economy with an almost insatiable demand for metals that supported a sustained construction program. Learning from each new project helped China’s engineers make further small enhancements as well as lowering construction costs. The consequence of this strategy is that now China is able to build simple, low-cost metallurgical plants that they staff with abundant low-wage workers performing simple and repetitive tasks. This is the opposite to the West, where capital costs are high because there are few projects, each with a different technology that tends to be complex so it requires highly paid skilled workers. …

Purchasing obsolete foreign metallurgical plants for transport and re-erection in China appears to have been a haphazard, though pragmatic practice that was not Beijing’s official policy; however, the central government did readily give its support when an SOE sought approval for such projects. … For China the timing of these changes was fortuitous in that they followed the oil shocks of the 1970s when the price of oil shot up from $3 to $37 per barrel in a decade, forcing steel and other energy-intensive industries to close or relocate to countries where energy was much cheaper. It was this restructuring of heavy industry that was the prerequisite for successful implementation of China’s policy. China’s abundance of low-cost, relatively skilled labor was another fortuitous factor favoring China because it made the dismantling and re-erection process a viable and competitive option that other countries could not have emulated even if they had wanted the facilities.

The lucky coincidence of a global restructuring of basic industries and the availability of a cheap skilled workforce is unlikely to be repeated, making it highly unlikely that China’s successful heavy industry development model will be replicated anytime soon. It is also unlikely that China could successfully recycle the model for use with anything other than a basic industry that produces a standard product to an international specification. There are examples, such as kaolin and titanium dioxide, where China acquired Western plants or technology designed to produce consumer goods, but was not able to successfully operate their acquisition. Consumer goods have a wide variation in characteristics that are custom designed to appeal to final consumers. …

Much of the criticism leveled against Chinese metals producers is that as a result of Beijing’s support they have built new capacity even when there is no economic justification and that such nonmarket forces have encouraged an enormous increase in new capacity. Because of the global nature of most metallurgical industries, critics argue that excess capacity in China has displaced production in other regions, resulting in localized job losses and even bankruptcies. While the logic of this argument is sound, the facts that justify the argument are questionable on at least two counts: first, China is not alone in subsidizing its metal producers, and second, irrespective of any government support, Chinese capacity is generally newer, more efficient, and cheaper to build than comparable foreign facilities.

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