Steel Hearings Take Aim at Overcapacity

As can be expected, the primary issue revolves around China’s contribution to excess global capacity and low steel prices. Opening remarks by Ambassador Michael Froman highlighted the difficulties facing the steel industry in the U.S. and around the world.

“We’re here to confront a truly global challenge. During the last 15 years, global steelmaking capacity more than doubled, while global demand growth has fallen back. A widening gap between global capacity and demand intensified after the 2008-2009 financial crisis due to continued capacity expansion and an uneven and sluggish recovery in steel demand.”

Froman noted that while the problem of capacity expansion is not limited to China, it is “obviously a big part of it.”

“With an explosion of steel-making capability over the past 15 years, China is now home to half the global supply of steel and the principal source of the world’s overcapacity. And rising global exports from China and elsewhere have put pressure on already weak global prices. Many governments have provided subsidies and other support to expand capacity, without giving adequate consideration to market considerations or adverse trade effects. And as a result, workers and businesses around the world are struggling.”

Philip Bell, President, Steel Manufactures Association, recommended actions to limit further expansion of steel capacity and bring capacity back into line with world demand. Strict enforcement of U.S. trade remedy laws are necessary and denial of market economy status to China until it can establish, under U.S. law, that it is entitled to market economy treatment. Binding international commitments to limit and reduce capacity are crucial, said Bell, as well as prohibiting government subsidies and government interference with operation of the steel market. Bell also urges strict limits on multilateral and export lending on steel projects which encourage capacity expansion.

Thomas Gibson, President and CEO, American Iron and Steel Institute, said, “The overcapacity crisis plaguing the global steel industry is largely a result of foreign government interventionist policies and practices. For example, China for decades has directly subsidized its steel industry and Chinese provincial governments continue to prevent obsolete capacity from closing. And this Chinese model of government intervention is now being emulated in other countries as well, perpetuating the growing overcapacity problem.”

Jim Darsey, Executive Vice President of Nucor Corporation, noted that as the “largest and most efficient steel producer in the healthiest major economy in the world,” profits have fallen by 70 percent in the past ten years and the company is operating at only 65 percent of capacity.

“Right now, the world has about 700 million tons more steelmaking capacity than it needs,” said Darsey. “To put that number into perspective, the entire U.S. steel industry produced 87 million tons of steel in 2015. Unless China shuts down at least 300 to 400 million tons of its capacity in the next three to five years, more American mills will close and more American workers will lose their jobs.”

Roger Newport, CEO of AK Steel Corporation said, “…I have been in the steel industry for 31 years, and I have never seen the conditions in the marketplace that we have experienced over the last two years. The U.S. government should strictly and thoroughly enforce our existing trade laws. It’s that simple – enforce the law. [And] the U.S. government should continue to treat China as a non-market economy for the purpose of the anti-dumping law. The U.S. government [also] needs to recognize that in many instances, trade relief on China alone will not be sufficient to address the problem of global overcapacity. Without effective action, the overcapacity in the market simply causes other countries to increase their exports to the U.S.”

Leo Gerard, President, United Steelworkers, urged the government not to support market economy status for China and said that the EU should not so either. Gerard said it is likely that goods China exports to the EU would be at dumping prices, pushing U.S. products to the EU out of the market. In addition, EU products exported to the U.S. containing Chinese steel could under undercut competing products in the United States.

“The U.S. government should make clear that China is not a market economy and is unlikely to be considered such for a long, long time,” said Gerard. “In addition, the U.S. should actively engage with the EU to make clear that what they decide to do later this year has clear implications for the U.S.”

“If the EU were to go forward and grant China Market Economy Status, Congress should reconsider whether fast track trade negotiating authority is appropriate for the Transatlantic Trade and Investment Partnership (TTIP). The USTR should be reviewing the market access offer they intend to make in the TTIP and reduce any potential benefits for the EU if they were to proceed with granting China Market Economy.”

Gerard told the hearing committee that broad-based import restraints are needed. “There are many tools in current law and at the WTO which would allow for action. Time is of the essence. The catalog of authority ranges from 201 to 232, to other authorities, including the International Emergency Economic Powers Act.”

“In my view, we should seek to have imports reduced by one-third within three months to help stabilize production and employment and give confidence to our producers that they should maintain productive capacity.”

Gerard also urges the U.S. to boost infrastructure spending along with Buy American polices. Domestic procurement policies in international trade negotiations are also a concern. Gerard said that rule of origin is one of the critical failures in the Trans Pacific Partnership agreement.

Using the automotive industry as an example, Gerard stated that “in essence, 63 percent of a vehicle’s content, by value, could come from China but be eligible for a Made in America sticker on its side. How on earth is that in our interest?”

“That is unacceptable at any time. At a time of crisis in the steel sector it is insanity and reason enough to defeat the TPP.”

US Senator Sherrod Brown (D-OH) argued along the same vein as Gerard, “The TPP would mean that less than half of the car must be made in a TPP country, which means fewer cars will come from the U.S. auto supply chain.”

Brown suggested the World Trade Organization should step in to address China’s steel overcapacity.

“The Chinese have committed to reducing steel production and setting capacity reduction goals, but have failed to follow through,” Brown continued. “The only meaningful way to address overcapacity is to bring a WTO case against them. China is in violation of its WTO obligations, and we need, along with our global allies, to hold them accountable.”

Lourenco Goncalves, CEO, Cliffs Natural Resources, discussed the environmental damage the overproduction of steel in China causes.

“In addition to the economic damage flowing from illegally dumped steel, one cannot ignore the very real damage being done to the global environment from China’s sinter feed iron ore-based steel production. Sinter-feed requires further processing in a sinter plant, resulting in staggering quantities of particulate and Greenhouse Gas emissions. These emissions are a major contributor to global climate change, as well as the estimated 350,000 deaths per-year in China resulting from air pollution.”

Goncalves also took aim at Australian iron producers for enabling China’s overcapacity. “Cliffs believes that not only has high polluting, heavily subsidized China failed to graduate to market economy status; but also Australia’s role in enabling China to produce excess steel should challenge the wisdom of granting Australia unfettered access to our U.S. market as part of the Trans-Pacific Partnership negotiations.”

US Steel CEO Mario Longhi said, “The American people – and this caucus – have declared that we must not rely on competitors or adversaries for vital elements of our national security. I contend that no element is more vital and fundamental than steel. The time for speculation and hand wringing has passed. We must now come together. Democrats and Republicans … government and the private sector … management and labor. We must join forces to preserve and defend our way of life by ensuring American industries can complete vigorously and unencumbered by harmful foreign practices.”

For readers who would like to access the transcripts from the hearings, they are available on the AISI website here.