Bayesian Vector Autoregression Forecasts of Chinese Steel Consumption

China consumed 116 million tonnes of steel in 2000, making it the largestconsumer of steel in the world. China differs fundamentally from other countries at similarlevels of economic development in that the secondary sector, the traditional consumer of steelproducts, already accounts for a significant proportion of domestic production. This suggeststhat little of any future growth in China’s steel consumption will result from further rises inthe ‘steel intensity’ of domestic production. Rather, growth in GDP will be the driving forcebehind future growth in steel consumption. This paper uses a macroeconomic Bayesianvector autoregression model to forecast steel consumption in China to 2010. This techniqueuses historical correlations among the variables in a system of equations and Bayesian priorson the estimated parameters, to introduce more flexibility into the forecasting process andalign the models closer in nature to structural commodity market models. The forecastssuggest that steel consumption in China will rise from 116 million tonnes in 2000 to around182 million tonnes in 2010.