Can China’s Steel Industry Survive Increased Global Protectionism?

Published on 30 Aug, 2016

China Steel Industry Analysis

As China’s biggest customers stem the flood of cheaper Chinese steel to safeguard their domestic markets, her overstocked steel industry will have to shape up to compete on a level playing field.

With construction booms slowing and global economic sentiment bearish, the global steel industry is recoiling. Plagued by excess capacity and an oversupply in recent years, the resulting low steel prices are threatening the survival of some major steel companies globally.

This is instigating countries around the world to impose heavy tariffs on imports of cheaper Chinese steel, a move to counter what’s being perceived as an unfair “dumping” of subsidized steel that’s hurting global markets.


Depressed Domestic Consumption Has Made Exports a Lifeline for the Chinese Steel Industry

China’s incredible growth over the past few decades led to a stellar increase in domestic demand for steel, with production increasing more than 12 fold over the past 25 years.

That seems like a thing of the past now though, with China’s current slowdown severely impacting domestic demand for steel.

According to the World Steel Association, steel consumption in China grew by just 1% in 2014, and growth was expected to slow further by 0.8% in 2015, mostly on account of the country’s waning real-estate and construction sectors. After runaway growth, China’s domestic demand for steel isn’t likely to pick up any time soon.

As of 2015 China produced more than 803.8 million tons of steel, with a decline of just 2.4% compared to 2014. On the contrary, domestic demand for steel in 2016 is expected to decline at 645.4 million tons, a drop of 4% (as compared to the 5.4% drop over 2015) that’ll compound an already massive surplus.

While Chinese manufacturers countered the pitfalls of an oversupplied domestic market by boosting steel exports — which jumped 36% y-o-y in the first four months of 2015 — the mounting tariffs and possible embargoes could counteract their most convenient option.


China’s Overcapacity and Government Subsidies Created an Uneven Playing Field

The industry blames its woes on China, accusing the country’s low-cost metal producers of flooding the global markets with cheap steel.  China now accounts for more than half of global steel production, up from just 10% under a decade ago.

In 2015 alone, steelmakers in China shipped a record 112 million tons overseas, up from the 82.1 million exported in 2014. As consumption in China’s booming construction sector waned, manufacturers looked abroad. The global market could now procure Chinese steel at prices 20% to 50% cheaper than its closest competitors. These low prices are hardly sustainable though, and many Chinese steelmakers appear to be afloat solely on government subsidies.

According to the European Steel Association (Eurofer), Chinese manufacturers receive several benefits from the government such as subsidies, preferential lending rates, and low energy charges; all of which enable Chinese companies to export at prices their European counterparts couldn’t possibly stomach.

China’s undercutting and oversupply is disrupting trade patterns across the globe, threatening the survival of local steelmakers everywhere from the European Union to Korea and India.

This is spurring some serious regulatory reform, and the world’s markets are doing what they must to create a level playing field.

Developed Nations Increase Protectionism 

Chinese exports to the U.S — the world’s second-biggest steel consumer — jumped 40% in January of 2015. Chinese steel dumps further depressed prices that were already reeling on account of the slump in American oil drilling. U.S. Steel — America’s largest steel company —had to temporarily let go of 614 workers at its Lorain facility.  The company has already idled six plants since 2014, issuing layoff warnings to around 3,500 workers just this year.

The crisis has threatened steel companies in other western countries as well.

Major players such as ArcelorMittal and Tata Steel have either closed plants or are planning to do so in near future. The crisis has already claimed more than 5,000 jobs among British steel companies as well, which are under even greater pressure than their European counterparts due to higher costs and less than generous tax regimes, UK steelmakers claim.

Growing concern from local steel companies has prompted countries like the US, Australia, and the European Union to adopt punitive tariffs on steel from China.

The US has increased import taxes on cold-rolled steel by five times to 522%, which includes anti-dumping duties of 266% and anti-subsidy duties of 256%.

The Australian government has imposed a customs duty of up to 57% on Chinese steel, which can vary based on the exporting company and product.

The European Commission has already imposed punitive tariffs ranging from 13% to 16% on various steel products from China, while countries such as Germany are demanding harsher trade war measures against China.

Other tactics include more diplomatic discourses.

The president of the European commission warned China that offloading cheap steel in European markets could very well jeopardize its bid to gain market economy status with the World Trade Organization. The EU has also commissioned fresh investigations that may lead to further tariff hikes.


China’s Steel Industry Will Need Streamlining and New Markets to Survive

China’s established overcapacity is unlikely to dissolve in the near future.

Most Chinese steelmakers are state-owned or linked to local government initiatives. Given their political importance in terms of providing employment, China’s steel mills are unlikely to curb production or fold up. While the Chinese government has reined in lending to sectors that face issues with overcapacity, manufacturers aren’t exactly having a hard time getting their loans refinanced or rolled over.

While the proposed regulations are unlikely to significantly dent Chinese exports as a whole  — steel constitutes less than 10% of her overall exports — the country has recognized its dire need to address manufacturing overcapacity. The Chinese government announced plans to eliminate 100-150 million tons of annual steel production over the next five years.

As per a cabinet release, firms controlled by China’s central government will cut steel and coal production capacity by a tenth over 2016-17. However, China's Ministry of Finance said it would "continue to implement a tax rebate policy on steel exports" as it eases what’s been an expensive capacity finance plan.

China is also looking for new markets.

Demand from non-major producing regions such as the Middle-East and Africa are China’s best bet to offload its massive industry surplus, at least in the short term.

While these regulations don’t pose an immediate threat to China’s hegemony, continued pressure and lobbying from major nations will likely accelerate plans to consolidate. If there’s any hope to prevail on a level playing field, the dragon needs to grow lean without losing its bite.