COLUMN-China is running out of time to cure its steel problems: Andy Home

(The opinions expressed here are those of the author, a
columnist for Reuters.)

By Andy Home

China is frantically trying to
apply the brakes to its runaway steel juggernaut.

Targets are being set for capacity closures, 45 million
tonnes nationally this year and 100-150 million tonnes over the
next three to five years.

Regional governments are heeding Beijing’s call. Yunnan
province, for example, has committed to eliminate 4.5 million
tonnes of capacity by 2018.

Local authorities are being urged to crack down on energy
usage in the sector with those that fail to meet efficiency
targets facing forced closure if they cannot improve.

A drive to consolidate the country’s fractured steel
production landscape has begun with Baosteel, the second-largest
Chinese operator, being pushed into a forced marriage with its
smaller and financially weaker peer Wuhan Iron and Steel.
nL4N19I052

Beijing, in other words, is using all of its
centrally-controlled levers to try and reform the sector.

It has good reasons to do so. Steel and coal, another sector
earmarked for “supply-side reform”, are not only littered with
non-performing “zombie” operators but major obstacles on the
path towards a greener future.

But the palpable sense of urgency is being dictated by the
growing international pressure on China to halt its surging
steel exports.

A failure to produce results is going to ignite an already
smouldering trade war with other global powers.

But can Beijing deliver? It’s going to help if it stops
pressing the accelerator and the brake pedals at the same time.
Even if does, though, it may be too little too late.

RAISING THE POLITICAL TEMPERATURE

Reform of the steel and coal sectors has been moving
steadily towards the top of China’s national policy agenda ever
since the 2009 shock-and-awe infrastructure boom started to lose
momentum a couple of years ago.

Left to its own devices Beijing would have preferred a more
gradualist process, not least because of the high social costs
of weeding out excess steel capacity and loss-making production.
An estimated 400,000 jobs would be lost if the full
150-million-tonne target is met.

But time is no longer on Beijing’s side.

The trade walls are rapidly being erected.

The U.S. International Trade Commission (ITC) last week
ruled that imports of both Chinese cold-rolled and
corrosion-resistant steel products were hurting local producers,
paving the way for hefty anti-dumping duties.

That just adds to a growing list of punitive U.S. tariffs
against Chinese steel-makers.

More may be on their way, including the nuclear option of
halting just about all imports proposed by U.S. Steel, which
alleges Chinese competitors stole its secrets and fixed prices.
Those claims are now being investigated by the ITC.

China has reacted with predictable anger, threatening to
take the United States to the World Trade Organisation.

But it is not just the United States that is piling on the
pressure.

Any failure by China to curtail its output and exports could
prompt the European Union also to take retaliatory action, not
only in steel but in other sectors.

“If the problem is not properly remedied, trade defence
measures may proliferate, spreading beyond steel to other
sectors such as aluminium, ceramics and wood-based products,”
warned the European Commission.

Aluminium in particular is another hot-button issue,
especially in the United States, where the ITC in April opened
an investigation into the domestic production sector and global
(read “Chinese”) trade flows. nL8N19C37H

Looming even larger for Beijing policy-makers is the
prospect of seeing China’s bid for market economy status at the
WTO founder on the rising protectionist waves.

OUTPUT UP, EXPORTS UP

In trying to react fast enough to head off a full-blown
trade war with the both the United States and Europe, China
faces two big challenges.

The first is the sheer scale of excess capacity in the
country. The most commonly cited figure is 300 million tonnes
which comes from the China Iron and Steel Association (CISA).

Not only is it a suspiciously round figure, suggesting as it
does an element of back-of-the-envelope calculation, but even if
true, Beijing’s official target of eliminating around half of it
over several years will not be enough to satisfy its critics.

The European Commission, for example, explicitly noted that
the pledge was insufficient, a point underlined by German
Chancellor Angela Merkel, who used a trip to Shenyang this month
to warn that as the world’s biggest steel producer, China “bears
a greater responsibility” for addressing global market
imbalances.

The second more pressing problem is the fact that both
Chinese steel production and exports are rising again.

National production has risen year-on-year in the last three
months after falling over the course of 2015 and
January-February 2016. Cumulative year-to-date output of 330
million tonnes is still down by 1.4 percent on last year but the
gap is fast closing.

Exports of steel products have risen by six percent so far
this year to 46 million tonnes and are on course to at least
match last year’s massive 112 million tonnes.

Higher production is a direct reaction to improved steel
pricing in China’s domestic market.

The speculative bull bubble of April has been burst but the
price of Shanghai rebar has picked itself off the
ensuing lows of 1,900 yuan per tonne to a current 2,241 yuan.
There are no signs that the retail crowd that fuelled the spring
frenzy has returned.

Rather, the steel price and steel producers are riding the
tail-winds of China’s mini stimulus at the start of the year,
which like all recent Beijing-designed economic boosters has
been focused on accelerated infrastructure spending.

This is the government foot that is still on the steel
accelerator, albeit with less force than in the past.

CLOCKS TICKING

Even assuming the effects of mini-stimulus wane over the
coming months, there is another, even more problematic dynamic
behind buoyant Chinese steel prices.

They are in part reacting to Beijing’s very targeting of
excess capacity. After all, less excess capacity promises better
profitability for those that survive the coming “supply side”
reform package.

Again, it’s a very rational market reaction to government
policy but one that promises higher output and, in all
probability, higher exports over the coming period.

That wouldn’t matter over a medium-term time frame, if it’s
the price to be paid for a leaner, cleaner Chinese steel sector.

But with the clock ticking on more steel sanctions, the
potential spread of “defence measures” to other sectors and an
end-year deadline for that much-coveted market economy status,
time is what China doesn’t have right now.

(Editing by Jason Neely)

Leave a Reply