Steel Exports from China Increase in June Highlighting Concerns on Excess Capacity

Charles Bradford, Bradford Research, warns against putting too much stock in monthly data from China which is subject to revisions and can show fluctuations depending on whether any holidays were celebrated that month, thereby reducing production and sales days. Anecdotal reports received by Bradford Research indicate that steel exports may soon moderate due to increasing domestic demand/pricing in China.

Excess steel capacity is considered the primary driver of increased steel exports from China, but Daniel Hynes, senior commodities strategist at Australia & New Zealand Banking Group Ltd., says the surge is not just due to overcapacity and that external demand for China’s steel is growing. In a comment made to Bloomberg, Hynes said, “China is gaining market share particularly in Southeast Asia, and we see that continuing.”

Beijing has taken steps to reduce capacity by 150 million tonnes by 2020, warning provinces that “serious punishment” will befall those who do not comply with mandatory reductions.

Baosteel recently announced it will reduce its output by nearly 25 percent by 2018. Baosteel and Wuhan Iron and Steel Group are discussing a merger that would consolidate production and eliminate inefficient facilities.

Bradford says that production reduction claims can be misleading and noted that Baosteel recently started a second blast furnace at a new 10 million net ton facility. Capacity cuts are often paired with expansions that offset any reductions, said Bradford. He added that production calculated as capacity versus capability also leads to skewed data. Bradford said he believes China steel capacity is actually lower than reported by Ministry data.

China and MES

Whether China can pull the reins in on state-run mills in its provinces and reach its target goal by 2020 is open to debate. Trade tension has increased due to the proliferation of trade suits claiming Chinese overcapacity and subsidization has made competition unduly challenging. And, the animosity against China exports couldn’t be at worse time with the government seeking market economy status.

Eurofer has urged the European Commission not to prematurely grant China market economy status, charging that China does not meet the necessary criteria.

Axel Eggert, Director General of EUROFER said ahead of the EU-China summit, “It is astonishing that the EU is putting itself on the defensive on the issue of MES, when it is clear that the ball is in China’s court. China must make progress towards its WTO commitments, work on reducing the massive overcapacities in a number of sectors, and make substantive progress towards market economy norms.”

Added Eggert, “The EU must maintain effective trade defence instruments in order not to put at risk millions of jobs as well as tens of billions of euros in annual investment. They must stand their ground and not submit to pressure from the Chinese government to adopt this damaging and unnecessary MES policy, particularly as China is not meeting its own obligations.

Jean-Claude Juncker, president of the European Commission, said in a speech in China, “I do not want to dramatise this issue… but there is a clear link between the steel overcapacity of China and the market economy status for China.”

Juncker added, ““I know how painful this adjustment process can be. I have some understanding for the problems our Chinese friends are facing when it comes to the reduction of steel production in China, when it comes to the closing of steel plants. But when we say that market rules have to apply, the Chinese know exactly that this, in concrete terms, means the closing down of steel plants.”

The American Institute for International Steel worked with US Trade Representative and Department of Commerce to bring the issue of steel overcapacity to the 2016 G-20 Summit. The issue was addressed and made a key part of the Summit final declaration. A portion of the declaration follows:

We recognize that the structural problems, including excess capacity in some industries, exacerbated by a weak global economic recovery and depressed market demand, have caused a negative impact on trade and workers. We recognize that excess capacity in steel and other industries is a global issue which requires collective responses. We also recognize that subsidies and other types of support from governments or government-sponsored institutions can cause market distortions and contribute to global excess capacity and therefore require attention. We commit to enhance communication and cooperation, and take effective steps to address the challenges so as to enhance market function and encourage adjustment.

The G20 steelmaking economies will participate in the global community’s actions to address global excess capacity, including by participating in the OECD Steel Committee meeting scheduled for September 8-9, 2016 and discussing the feasibility of forming a Global Forum as a cooperative platform for dialogue and information sharing on global capacity developments and on policies and support measures taken by governments.

China response

China has called U.S. antidumping and countervailing duties placed on exports on a variety of steel products “protectionism” and has turned to the World Trade Organization for defense.

“With regard to the United States’ mistaken methods that violate WTO rules, China is and will continue to take all measures, including filing suit at the WTO, to strive for fair treatment for enterprises and safeguard their export interests,” said the ministry following duties assessments on cold rolled and corrosion resistant steels.”

The latest round of countervailing duties, imposed on stainless steel imports, ranged between 57.3 percent and 193 percent and prompted China’s Commerce Ministry to accuse the U.S. of deliberately misinterpreting WTO rules.

China’s commerce ministry said in a statement it was not satisfied with the decision and that it would use the WTO dispute settlement process to defend its interests. The ministry said that the US’ behavior is against a consensus to avoid protectionism reached by G-20 commerce ministers.

At the G-20 meeting China commerce minister Gao Hucheng said, “China’s steel industry is not export-oriented. China is not only the world’s largest steel producer, but also the biggest consumer.”

The China Post reported that since the beginning of the second half of 2015 more than 50 cases were brought against China for dumping of steel products. Wrote the China Post, “The Chinese representatives at the G20 Trade Ministers’ Meeting said such countries certainly ignored Chinese companies’ high efficiency and low labor and production costs, so China became the ‘victim of extreme anti-dumping measures.’”

At the EU-China business summit in Beijing on July 12, China’s Premier Li Keqiang told EU officials that China is committed to tackling steel overcapacity and does not use subsidies to give industries a competitive edge.

“China’s will to solve the problem of steel overcapacity is resolute and our measures are effective,” Li said. “We hope that the European side can look at this issue from an unbiased perspective.”