Steel Wars

The situation in the steel market is littered with a dizzying number of unfair trade practice accusations and counter-accusations. Is any particular nation or leader responsible for the current situation? A closer analysis is required to understand the factors determining the choices being made by the players in this battle for steel markets.

Steel Production and Capacity

Source – www.worldsteel.org

The major players in production of steel are China, Japan, US, EU and South Korea. Global steel production was 1.1 billion metric tons in 2005. It grew to 1.6 billion metric tons by 2015, an eye popping 41.4 percent increase in production.[1] A large part of this production increase was led by China. Global steel production capacity grew at an even higher rate, by 71.9 percent in the same ten year period.[2]

Of the 1628.5 million tonnes produced in 2016, China produced 808.4, nearly half of the world’s total output.[3]in February 2016, the Chinese State Council announced that China wouldcut crude steel capacity by 100 million to 150 million tons over the next five years.[4]Despite agreements to function at lower capacity utilization and to cut down production[5], China’s rapid increase in installing such capacity has meant that there has been limited reduction in overall production and a net increase in capacity.

Truth behind the Chinese Miracle

In 2000, China was a net importer of steel with 13% of world imports and 16% of global output. By 2007, it had become the world’s largest producer, consumer, and exporter of steel.[6]The Chinese steel industry is heavily subsidized. In the first half of 2014, subsidies accounted for nearly four-fifths of the profits of Chinese steel companies![7] These are largely in the form of tax rebates, subsidies and loan repayment assistance by the local governments, which are investing heavily in the steel and cement industries to reduce the impact of the economic slowdown.[8]Moreover, Chinese steel producers enjoy cheap energy (heavily subsidized), labor and regulatory charges such as taxes and rates; thus enjoying a competitive advantage over other steel producing nations.These collective measures allowed it to sell steel at 25 to 30% lesser than the one produced by the US or India despite no economies of scale or other competitive advantage in the 200-2007 period.[9] Given the price drop that the industry has experienced after the recession, this margin has probably widened. Canada,the US, EU and Japan even submitted a joint paper on the role of subsidies in creating overcapacity to WTO’s Committee on Subsidies and Countervailing Measures on 25 April 2017.[10]

Lower Demand amid Global Slowdown

Global steel demand peaked in 2013. Demand has plateaued since then but there have been significant regional variations, which have changed the dynamics of the industry. Demand within China has dropped considerably. According to Li Xinchuang, president of the China Metallurgical Industry Planning and Research Institute, a Chinese think tank, China’s steel demand in 2017 is expected to fall to 660 million tonnes, a reduction of 1.9 percent from the previous year.[11]World Steel Association estimates out this figure at 652.3 million tons.[12]As the major producer and consumer, China has a disproportionate control over the steel market trends. Even a two percent drop in consumption is significant. The global slowdown has already put the industry in dire straits and China’s economic slowdown is only hurting the industry further.

The difference between global production and global demand increased to 115 million tonnes for 2016 according to estimates by the World Steel Association.[13]

Caption - Global Crude Steel Production and Apparent Global Finished Steel Consumption in 2016; Source – www.worldsteel.orgSource: World Steel Association

Increased Chinese Exports

The logical corollary of this jump in production coupled with reduced domestic demand in China is a sharp rise in exports. 2009, followed by 2013 were both years which witnessed a changed trajectory. Until 2005, Chinese capacity did not exceed its own demand to such an extent that it could completely change international market dynamics. This has now changed. China’s exports jumped from 26.88 million tons in 2005 to 110.93 million tons in 2015, reducing slightly in 2016 to 107.8 million tons.[14]

Increased trade, by itself, must be encouraged. China’s excess production in 2016 after subtracting its internal consumption and exports from total production was 35 million tons. This excessive production has led to unfair means adapted to capture the market in any manner possible. This is reflected by the drop in steel prices as well.

Trade Remedies

Under the World Trade Organization (Hereinafter, “WTO”) framework, various trade remedies are available to nations to counteract the adverse impact of unfair trade practices and promote free trade. These can be broadly divided into countervailing duties (Hereinafter, “CVD”) (imposed to neutralize the advantage of subsidies in the home country), anti dumping duties (Hereinafter, “ADD”) (remedy against sales at less than fair value of the product) and safeguards (remedy against an import surge). The Agreement on Subsidies and Countervailing Measures (the Subsidies Agreement); the Agreement on Implementation of Article VI (the Antidumping Agreement); and the Agreement on Safeguards (the Safeguards Agreement) are the WTO treaties which govern this framework. Imposing CVD or ADD requires the nation to demonstrate unfair trade practices by the exporting nation which harm the domestic industry while safeguards is temporary emergency measure imposed to protect the domestic industry from sudden export surges.

The United States had more than 150 active antidumping and countervailing duty orders on steel products in 2017.[15]It slapped punitive duties up to 450 per cent on cheap steel imports from China, India, Italy, Korea and Taiwan.[16]Donald Trump, the US President has also initiated investigations under Trade Expansion Act of 1962 to limit import of steel by deeming it critical to national defence.[17] India imposed anti-dumping duty on 47 steel products for five yearson hot-rolled flat products of alloy or non alloy steel, originating in or exported from China, Japan, Korea, Russia, Brazil and Indonesia.[18]The EU currently has an unprecedented number of trade defence measures in place targeting unfair imports of steel products, with a total of 43 anti-dumping and anti-subsidy measures, 20 of which are on products originating from China.[19]

On the defensive side, India had moved the WTO in 2014 against the US imposing high duty on imports of certain Indian steel products then and again in 2017 for non compliance of the unfavourable rulings.[20]In its annual report on unfair trade practices, the Ministry of Economy, Trade and Industry of Japan cited eight cases of anti-dumping measures by China, the United States, South Korea, India and Turkey on Japanese products which it believed were incompatible with World Trade Organization rules.[21]

The collective complaints against China are by far the highest.[22]

Source: International Trade Administration, Global Steel Trade Monitor, http://trade.gov/steel/countries/pdfs/2016/annual/exports-china.pdf

Way Forward

Despite the imposition of duties by a majority of the importing nations, the steel market is in free fall. Due to China’s monopolistic behavior and unfair subsidies to the fragmented uncompetitive domestic steel industry, free trade in the steel market has failed completely. Other producers like Japan, India, EU and the US have suffered in two ways – first, the underhandedcapture of their markets by the Chinese industry and secondly, the imposition of trade barriers by other importing nations at a time when the domestic economies are struggling to stay competitive in a market flooded with Chinese products. The root cause of this problem is excessive Chinese production and capacity, facilitated by heavy state subsidies. The unfair practices that led to this situation are fuelled by China’s desire to become the largest economy globally. Its One Belt One Road project has a large economic component to channel this excess capacity, to the detriment of free trade.

The affected nations must combine in an effective trade bloc and use their importing capacity as leverage to force China to move towards an open market. Collective opposition to China’s clamour to become a market status economy at the WTO is another tool available to these nations. This will also ensure that the ADDs imposed by them are open to a fair challenge at the WTO. The long term approach can be the formation of an OPEC like bloc with China and the voluntary restriction of production to ensure that the steel prices do not stay artificially low.