If China Produces Too Much Steel, Why Is It Buying Mines In Africa?

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Written by Staff

From TheEconomist.

Africa’s second-largest iron-ore mine in Tonkolili, Sierra Leone, lies silent and still.

The slump in the price of iron ore and the Ebola epidemic killed off profits, and it was closed by African Minerals, which owned it, last December.

China’s state-owned Shandong Iron and Steel Group saw the closure as an opportunity and snapped up the mine in April.

Chinese firms, it seems, are buying into the market while stocks are cheap. Hebei Iron and Steel Group is building a massive steelworks in South Africa; last month it received approval to takeover the Swiss firm Duferco’s African steel processing and sales network.

There may be reason to be suspicious of Chinese steelmakers’s motives. To some, it looks as if China simply wants to export its domestic pollution abroad. Officials are desperately trying to close dirty domestic steel plants. Persuading China’s Iron and Steel Association to do their business in Africa neatly combines environmental concerns with the government’s geopolitical motives to push investment into the continent.

But many question the economic rationale behind the move. The problem is that China already produces too much steel. The country already makes almost as much crude steel a year as the rest of the world combined—822 million tonnes in 2014—adding to the current global glut.

Chinese steel is at its lowest price in over a decade and most firms producing the commodity in the country are loss-making. Rather than displacing the sector abroad, China needs to shrink it.

There is a more favorable interpretation, however: that Chinese firms are taking a longer view of Africa’s potential.

Read more at TheEconomist.