Introduction

The world steel production landscape has been changing dramatically since the

1980s. One notable trend is for firms in industrialized countries to reallocate iron

and steel production facilities to developing countries. Growing production capacity

in developing economies, especially China, has been fostering their economic

growth and expanding their exports on low-value-added steel products. Since

2002, China has overtaken the EU to become the world’s largest iron and steel

exporter. However, along with this growth, energy shortages and increasing

greenhouse gas (GHG) emissions are threatening sustainable growth in these

countries and globally.

The iron and steel sector accounts for about 19% of global final energy use, about

a quarter of direct CO2 emissions from the industry sector, and roughly 3% of

global GHG emissions, mainly CO2 (OECD, IEA, 2007). As China is the world’s

largest iron and steel producer, there is serious concern for it to increase energy

efficiency and reduce CO2 emissions in the steel industry. Iron and steel have a

complex industrial structure. The efficiency of an iron and steel plant is closely

linked to several elements including technology, plant size and quality of raw

materials. Owing to the large proportion of small-scale blast furnaces and high

proportion of basic oxygen furnaces (BOF), the energy efficiency of China’s iron

and steel industry, on average, is lower than that in industrialized economies, for

example the European Union.

Thus, industrial restructuring in China’s steel industry is highly desirable. And by

the same token, joint efforts by industrialized and developing countries to tackle

global energy shortages and global warming are presenting new challenges and

unprecedented business opportunities to the European steel industry. Enhancing

technology cooperation, information-sharing and joint research between the EU

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and China are required.

Iron and steel trade flows between the EU and China have changed dramatically in

recent years. This study aims to explore the opportunities for cooperation between

them in this sector. It will address concerns about first, the development and

structure of the global steel industry and China’s growing production capacity;

secondly, energy efficiency and CO2 emissions in the steel industry; thirdly, EU–

China steel trade; and fourthly, policy suggestions for enhancing EU–China

cooperation in the steel industry to tackle energy and environmental issues.

The world steel industry

World steel production

Iron and steel are the main constituents of many products used in everyday life.

Crude steel is used to make semi-finished and finished products destined for the

consumer market or as inputs for further processing. Semi-finished products

include steel shapes (blooms, billets or slabs) that are later rolled into finished

products such as beams, bars or sheet. Finished products are subdivided into two

basic types: flat and long products. There are more than 3,500 different grades of

steel with many different properties – physical, chemical and environmental.

Alloyed steels, which are sometimes also called special steels and may be

considered specialty products, contain small portions of alloying elements such as

chromium, cobalt, manganese, molybdenum, nickel, niobium, silicon, tungsten or

vanadium. They are used in special applications, particularly those requiring high

strength or corrosion resistance. The most important of these is stainless steel,

which contains mainly chromium and nickel in varying proportions. Alloyed steels

account for a relatively small portion of all finished steel products, and their

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production and use are concentrated in developed countries and also in China.

The history of the world steel industry can be divided into three periods: two booms

and one transformation. The first steel industry boom lasted from 1950 until the first

oil crisis in 1973. This period witnessed a flourishing world steel market sustained

largely by the reconstruction of European countries after the Second World War

and their automotive industry boom. However, the 1973–4 oil crisis put a brake on

the fast pace of steel production growth and further led the global steel industry into

a transformation era lasting two decades. The period 1975–2000 was

characterized by production stagnation, in terms of scale, and structural

transformation driven by widespread technological innovation which created 75%

of the categories of steel products used today.

Figure 1: World crude steel production, 1950–2006

Source: IISI.

The second steel industry boom started at the beginning of the 21st century. Since

2000, world crude steel production has risen at an unprecedented rate. According

to the International Iron and Steel Institute (IISI), world steel production has

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increased by nearly 63% from 750.1 million tonnes to more than 1.22 billion tonnes

between 2000 and 2006. This dramatic growth was especially remarkable during

the period 2002–06, when production rose at an annual rate of 8%. Developing

countries such as China, India and Brazil were the main contributors to this second

steel industry boom.

Figure 2: World crude steel production, 1975–2004 (million tonnes)

1400

1200

1000

800

600

400

200

0
1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

Source: IISI.

The value of world exports of iron and steel (Standard International Trade

Classification (SITC) position 67) doubled in the period 1985–2002 from US$70.3

billion to US$143.2 billion, while their share in total world merchandise exports fell

from 3.64% to 2.27% and their share in world commodities exports rose by 0.5%

(from 10.2% in 1985 to 10.7% in 2002 (UNCTAD, 2005).

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China’s steel industry

China is one of the main contributors to the recent global steel industry boom. Over

the period 1996–2006, China’s crude steel production increased by 316.9%, a rate

higher than that of any other country or region: India (60.4%), Russia and Ukraine

(together 55.9%), the EU (16.9%), or NAFTA (5.7%). 1 By 2002, China had

overtaken the EU as the world’s largest steel producer.

In 2006, world crude steel production of the 67 countries reporting to the IISI was

1.22 billion tonnes, of which China alone accounted for 34.6% with its annual

production rocketing to a record 423.1 million tonnes. At the same time, compared

with China’s phenomenal growth, total crude steel production in the EU stagnated,

decreasing slightly to 164.7 million tonnes or 13.5% of the world total. As Figure 3

shows, China is the world leader in steel production.

Figure 3: Major economies' crude steel production, 2001–06 (millions of metric

tonnes)

450

400

350

300

250

200

150

100

50

0
2001 2002 2003 2004 2005 2006
EU Russia/Ukraine NAFTA Brazil China India Japan/S. Korea

Source: IISI.

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At the same time, there has been a sharp rise in China’s export capacity. In 2006,

in terms of quantity, it overtook Japan, Russia and the EU-25 to become the

world's biggest steel-exporting country. Its steel exports reached 49.2 million

tonnes − an increase of 92% over the figure of 25.7 million tonnes in 1975. Europe

and America have increasingly seen a wide range of steel products from China

flowing into their economies.

China is not only the largest steel producer; it is also the largest steel consumer

(see Figure 4). In 2006, its total steel consumption rose to 356 million tonnes,

accounting for more than 30% of the world total, ahead of consumption in the rest

of Asia (247 million tonnes), the EU (185 million tonnes) and NAFTA (155 million

tonnes). However, at the same time, China has clearly become more self-sufficient

in steel; its steel trade deficit peaked at 35.4 million tonnes (worth US$18.3 billion)

in 2003 (IISI, 2007a). China slipped from second largest importer in 2005 to fourth

largest in 2006. Its steel imports fell to 18.6 million tonnes, down 30% on the total

of 26.8 million tonnes for 2005. With its crude steel self-sufficiency rate up from

88.8% in 2000 to 91.3% in 2005, 2 China could become an importer of high-value-

added products.

China’s strong production capacity was fuelled by surging domestic demand, which

accounted for more than one-third of total world steel consumption in 2006. Steel

consumption increases as governments invest more in infrastructure and transport

and business and private sector build new factories and houses. Remarkably, the

construction and automotive sectors function as the main drivers of the surging

domestic consumption. The construction sector alone accounts for more than half

of Chinese demand for steel. Strong economic development has intensified the

1 Data source: IISI, 2006.

2 Sources: OECD 2007a, 2007b, IISI 2007a.

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demand for construction of industrial facilities and factories, residential housing,

railways and bridges, etc. The booming automobile industry also contributed to

rising domestic steel consumption. According to the Chinese Steel Industry

Association’s forecast, China’s steel consumption will grow further by 9% per

annum until 2011, reaching 550 million tonnes. Apparently, therefore, flourishing

fixed investment and demand for domestic consumption have been the driving

forces behind China’s steel industry boom in recent years.

Figure 4: Apparent steel consumption by major area, 2006 (world total = 1,113 mt)

Asia (excl. China),

247
China, 356

Middle East, 37

Africa, 22

Latin America, 36

NAFTA, 155
EU-27, 185
CIS, 48
Other Europe, 28

Source: IISI.

EU steel industry

EU crude steel production dropped slightly from its 2004 peak of 193.5 million

tonnes to 164.7 million tonnes in 2006, accounting for 17% of the world total.

Germany, France, Italy and Spain are the four largest producers.

The EU, together with the United States, remains one of the key steel-importing

regions, importing a record 39 million tonnes in 2006 − 12 million tonnes more than

in 2005 − of which 4 million tonnes came from China. The United States also

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imported an extra 12 million tonnes in 2006 − up 42% on 2005, with significant

increases in imports from China and Russia − although the tide turned in 2007 and

US imports are currently on a downward trend.

The structure of EU consumption and demand is different from China’s. Although

construction is also one of the main drivers of increasing demand in the EU, its

contribution to total EU steel consumption is only slightly higher than that of other

sectors. As reported by the European Confederation of Iron and Steel Industries

(Eurofer), construction, automotive, mechanical engineering, metalware and tubes

accounted for 24%, 18%, 13%, 13% and 10% respectively of EU total steel

consumption in 2006 (Eurofer, 2007b).

Energy efficiency

There is little doubt that at least one of the advantages of steel producers in China

and some developing countries has been the weak environmental control in these

countries. With increasingly serious concerns over energy and environmental

issues in industrialized economies, this fact alone has pushed and will continue to

push world steel production away from countries with strict environmental law and

regulations to those with more lax ones.

Best available technique

One way of estimating the potential for improving of energy efficiency and GHG

emissions is to compare the actual level of energy use and the level that could be

achieved through the use of the best available technique (BAT).

European Union Directive 96/61/EC concerning integrated pollution prevention and

control (IPPC) defines BAT as ‘the most effective and advanced stage in the