ALACERO Comments on China Steel Industry

How have Chinese steel exports affected the Latin American steel industry?

China established the steel industry as a strategic sector and began to develop domestic capacity with strong government support and financing. In just one decade, China became the world´s main steel manufacturer, accounting for 50% of the steel produced globally and becoming the world´s largest exporter.

It is important to keep in mind that this steel industry development was possible because China is not a market economy and allows its government to intervene in all possible forms in the industry; something that it is not possible in a market-oriented economy.

After the global economic crisis of 2008, demand from China´s main international markets (South Korea, Japan and Europe) decreased and trade barriers turned stricter. Latin America became then an appealing destination for Chinese steel and steel-containing products. Finished steel imports from China began to arrive at increased volumes and decreasing prices, most times under unfair trade conditions (dumping or subsidized prices).

Chinese trade behavior reflects a national strategy that boosts exports in order to keep its plants operating at capacity and avoid unemployment and social unrest. Financial considerations regarding almost negligible earnings at these prices come second to the fact that Chinese steel plants are state owned companies that benefit from its support and subsidies. There is no need for a profit; the government subsidies fill the gap.

As the Chinese economy decelerated and the domestic steel consumption decreased, China became even more aggressive on its foreign markets and the situation turned critical for Latin America.

Ten years ago, Latin America was a net exporter of steel to China. In 2014, we are running a significant steel deficit with that country.

Last year, China´s total exports were 84.8 million tons of steel. Latin America (that accounts for less than 5% of the global steel consumption) received about 10% (8.3 million tons) of those exports and became China´s second largest international market, only surpassed by South Korea.

In our continent, Chinese finished steel imports grew 56% (2014 vs 2013) and represent 30% of the regional steel imports and 12% of Latin America´s consumption. It is important to notice that, on average, Latin America is receiving Chinese steel at prices per ton that are 6% lower than those registered for Chinese steel exports to the rest of the world.

This situation is especially harmful for the regional steel industry that cannot compete against subsidized state-owned companies that do not operate under market conditions. The private sector companies cannot compete against the government.

The consequences for our region are at sight. In the short run, job losses and plant closures, losing market share, price weakness, increasing financial loses and unfair trade.

In the medium term, the industrialization of our continent is at jeopardy.

Trade frictions in the region have escalated as Latin American steel companies struggle to secure a level playing field via antidumping investigations. But these investigations address partially the unfair trade issues with China. Currently, there are 19 steel related in-process antidumping cases in Latin America, 12 of them against China. Also, there are other 42 in-place antidumping duty rates, 24 of them against China.

In Alacero, in coordination with national associations and our members, we work to ensure that national governments take action to implement a “level playing field”, as we understand that only with government commitment will be possible to effectively address unfair trade practices and boost Latin American competitiveness.

What areas of the revised policy are of particular concern to Alacero?

Two areas of the revised policy are of particular concern to Alacero. 1) The Adjustment Policy does not meaningfully address China´s overcapacity problem; 2) It reinforces the controlling role of the government on the steel industry.

Overcapacity in China.

China has a severe overcapacity problem (50% of the world´s overcapacity is in China). This is China´s steel industry greatest challenge and is directly responsible of the surge in steel imports under unfair trade conditions to Latin America.

The Policy acknowledges the problem and sets the objective of reducing capacity to “reasonable” levels and raising utilization rate to 80% by 2017. However, it falls short when it comes to find the instruments to achieve this capacity reduction.

Capacity reduction requires mandatory closure of significant melting and rolling capacity, letting market forces dictate industry developments and limiting the playfield to competitive players. However, the Policy limits market exit just to “outdated capacity” and those who do not meet certain administrative standards.

Proposed M&As and industry consolidation are not good solutions, either. A reduced number of players do not necessary mean reduced capacity. In contrast, these measures may encourage capacity building, as local governments will be tempted to subsidize the expansion and upgrade of local companies to prevent their closure or consolidation into enterprises from other cities or provinces.

Domestic overcapacity will be transferred abroad via government support in the form of investments and acquisitions. A good example of this: Hebei Province has announced its intentions to reduce provincial overcapacity by transferring 5 million tons of steel capacity abroad by 2017 and 20 by 2023. (As a reference, Mexico –Latin America´s second largest market- produces about 18 million tons of steel annually).

State-controlled and subsidized industry.

The Policy aims at making “the market play a decisive role in the allocation of resources”. However, at the same time, it articulates the conflicting objective of “more effectively bringing about the role of the government and guiding the next ten years of the steel industry’s developments”. A closer look on the measures reveals that the Policy will not allow the market to play a key role, but demonstrates that the government plans to continue its top-down management of all major aspects of the steel industry (from the number and location of the companies, to the products, the level of output or the technologies to be used). Moreover, the Policy is very specific in terms of the standards, technologies and procedures that should be put in place, and the role the government will play to support those developments and the companies involved. Specifically, the Policy calls for the government to continue “supporting”, “encouraging” and “promoting” a variety of commercial activity.

Also, it does not remove the primary barrier to market reforms in the Chinese steel industry: state ownership. It limits “mixed ownership” to an experiment with small companies, a policy that has been applied to other industries in China with no success: private capital is injected while the government keeps a substantial stake and managerial control.

In sum, the Steel Industry Adjustment policy of the Chinese government does not give the full confidence that it is a policy in the right direction. As was stated in the steel association´s position paper: “(this) policy does not introduce market-oriented reforms that are sufficient to achieve these goals and will therefore not adequately address the significant problems facing the Chinese steel industry”

Do you have any comments on the general state of the global steel industry?

2014 will be remembered as a difficult year for Latin America and its steel industry. According to analysts and international organizations, the global scenarios for 2015 should show certain improvement, pointing to a modest recovery in the steel demanding sectors. However, the existence of negative factors, such as overcapacity and growing steel exports from China, could affect such perspectives.

In the case of Latin America, both 2015 and 2016 will be difficult years for the steel industry. Regional economic weakness will affect demand and Chinese exports (under unfair trade conditions) will continue to erode local competitiveness.

Also, the sharp fall of oil and raw material prices (Latin America´s main exports) revealed regional exposure and vulnerability.

Worldsteel Association´s figures indicate that demand for finished steel in Latin America will fall slightly in 2015 to 70 million tons (-1.4%) to recover 3.6% in 2016 and reach 72 million tons.

About ALACERO

Alacero – Latin American Steel Association – is the organization that brings together the Steel Value Chain of Latin America to promote the values of regional integration, technological innovation, corporate responsibility and social and environmental sustainability. Founded in 1959, Alacero is formed by 50 companies of 25 countries, whose production – of about 70 million annual tons – represents 95% of the steel manufactured in Latin America. Alacero is a Special Consulting Organization to the United Nations and is recognized as International Non-Government Organization by the Republic of Chile, host country of Alacero’s headquarters.