Steel Storm. Steely Trading

China is widely blamed for the massive lay-offs in the industry worldwide and its competitors are imposing heavy dumping duties on its products.  How China handles that positioning will influence how protectionist the world becomes.

published in the South China Morning Post.             Download article  Adobe_PDF_file_icon       

Lion Steel storm, 27 May, 2016The US Department of Commerce is proposing a whopping 522% duty on Chinese steel. “That is an outrageous and flagrant abuse of the World Trade Organisation rules,” said my friend, an American steel trader. It was only after doing the research and running the numbers that I agreed with him.

China is widely blamed for a global steel crisis that has caused over 13,000 layoffs in the U.S. and will likely cause the extinction of the British steel industry by the middle of the next decade. James Bouchard, CEO of U.S. producer Esmark said on CNBC this week, “the Chinese will always make a lower price, there is no bottom, everyone else has said ‘no more’.”

Steel index prices are at a record low, down 71% in a year according to Trading Economics. Global steel making capacity is 2.4 billion tonnes a year but global demand is a measly 1.5 billion tonnes.   Chinese mills produce over 800 million tonnes a year, exactly half of the world’s output. The global industry is fragmented and competitive. Europe produces 20% of demand, the US 10%, and the UK just over half a percent.   Global demand fell nearly 2% last year, and will stage only a fractional recovery this.

China’s centrally organised economy encouraged the catastrophic over-building of steel mills in the 2000’s, supported by a free rein on borrowing by local governments. It takes millions and years to build a mill and they have to run at full bore to make money – but today global capacity utilization is only 68%. The U.K. industry is losing £1 million each day. Steelmakers are desperate to sell every single extra gram. Average import prices from Europe into the UK were €900 a tonne in 2014, but Chinese steel averaged just €580. Not surprisingly, Chinese imports into the UK jumped to 687,000 tonnes in 2014, from 303,000 tonnes the year before.

It was an Englishman, Henry Bessemer, who kick-started the Industrial Revolution by inventing steel in 1690. Steel was once part of the “commanding heights of the UK economy” with 350,000 employees in 1967. It now has less than 18,000, a tiny fraction of UK employment. In Wales today, workers are losing the jobs their fathers had before them, and their fathers before that, because European Union rules restrict government subsidies to rescue failing steelmakers.

In a free economy, steel companies must adapt to changing markets without artificial support. The UK government recently declined a proposal to assist Sheffield Forgemasters, which would have cost £500,000 for each job. It would have been cheaper to give each worker the money and tell them to go away. Wuhan Iron and Steel did this in March by telling workers to take a month off. “They don’t dare say xiagang [lay-off] — they say ‘take leave’,” said one steelworker, quoted in the Financial Times. The jobs go but the workers remain.

Whatever their competitors say, Chinese steel is naturally cheap. If you build big, your costs will be cheaper. The question is whether China is selling at price levels where non-Communist manufacturers cannot compete. If the proletariat is subsidising weak businesses, suspect management and power costs, and are soft on climate change, you will always be open to criticism.

Premier Li Keqiang called for capacity to be rationalised by 10% even as China milled a record 70 million tonnes this April. Wuhan will this year lose more jobs than the size of the entire UK steel industry but the government will cover 10b Yuan (USD1.5B) in restructuring expenses. Chinese exports may only be 14% of domestic production but they still impact world prices. So the U.S. Department of Commerce (through the International Trade Commission) is already close to imposing a dumping tariff of 266% on some Chinese steels and 71% on some Japanese steels. The EU last year imposed anti-dumping duties for six months on some imports from China and Taiwan.

The industry deserves some sympathy. Half a million steel jobs are now under threat, the majority in China, as they pay a heavy price for wasted, state-sponsored, debt-fuelled investment. But steel, like oil, is highly strategic. Construction may be the biggest use at present, but as a war materiel, steel is paramount. It was at the heart of the formation of the European Union, vital as it is to the industrial-military complex.

There is a strong chance that China will end up with the lion’s share of global production as competitors go to the wall. How China responsibly handles that positioning, will influence how protectionist the world becomes in the twenty twenties.

 

Richard Harris is Chief Executive of Port Shelter Investment Management. www.portshelter.com

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