China’s Steel Output Climbs Despite Cuts – Analysis

By Michael Lelyveld

Another month, another record for Chinese steel manufacturers.

Despite complaints from competitors around the world, China’s steelmakers set an all-time high for output in April, breaking their previous monthly record in March.

Normally, a one-percent month-to-month increase might hardly be noticed. But China’s crude steel production of 72.78 million metric tons comes at a time when the government claims to be making steep cuts in production capacity.

The problem of China’s booming steel production is symptomatic of the government’s priority for growth over reform, cited by Moody’s Investors Service in its decision to downgrade the country’s sovereign debt last week.

“The importance the authorities attach to maintaining robust growth will result in sustained policy stimulus, given the growing structural impediments to achieving current growth targets,” Moody’s said in a statement on May 24.

“Such stimulus will contribute to rising debt across the country as a whole,” it said.

The conflicts over steel have been prime examples of China’s pursuit of high economic growth rates, leading the government to argue that it is reducing production capacity while steel mills are increasing production at the same time.

On May 11, the official English-language China Daily reported that the steel and iron industries had reduced excess production capacity by 31.7 million tons so far this year.

The cuts announced after a meeting of the cabinet-level State Council were hailed as an achievement, fulfilling nearly two-thirds of the government’s goal to slash surplus capacity by 50 million tons in 2017.

“China is taking the initiative to reduce production capacity based on its own national conditions. The efforts are to make the growth model and economic structure move to new economic drivers,” said Premier Li Keqiang, as reported by state media.

That would be good news for foreign steelmakers who have complained for years about the glut of Chinese steel on the market. It would also be welcomed by citizens who have struggled under clouds of smog from coal-fired steel plants.

Record suggests otherwise

But the record output suggests that the capacity cuts have little or nothing to do with how much steel China is producing.

In 2016, China’s crude steel output of 808.4 million tons accounted for 50.4 percent of global production, according to World Steel Association data.

Last year’s production edged up 0.5 percent in a year when the government said it had lowered capacity by 65 million tons.

So far this year, China’s production has climbed 4.6 percent from a year earlier despite the capacity cuts, the National Bureau of Statistics (NBS) reported.

The increases are possible, in part, because China’s excess capacity vastly exceeds its reduction goals.

Before the government ordered the industry to start cutting in early 2016, China’s crude steel capacity stood at 1.13 billion tons, according to a Ministry of Industry and Information Technology (MIIT) official quoted by Reuters at the time.

But China produced only 803.8 million tons in 2015, leaving it with a huge surplus capacity of more than 326 million tons and a capacity utilization rate of 71 percent.

The excess was more than four times the volume of U.S. crude steel production last year.

The problem was actually worse because China’s domestic steel demand was likely to remain at 630 million to 700 million tons during the next five years, the MIIT official said. The remaining production would be exported at low prices, triggering antidumping measures and trade complaints abroad.

In April, President Donald Trump ordered an investigation into whether steel imports are harming U.S. national security.

Last week, China’s Ministry of Commerce (MOC) rejected claims that the country is responsible for “global steel overcapacity, saying its exports have little impact on the U.S. steel industry,” the official Xinhua news agency reported.

Instead, the MOC argued that shrinking demand is the “root cause” of overcapacity around the world. The country’s overwhelming share of the world market may make that argument a tough sell.

In February 2016, the State Council announced plans to cut capacity by 100 million to 150 million tons “over the next five years,” Xinhua reported.

As the year progressed and foreign pressure increased, the government pushed industry to move faster on cuts. As a result, officials claimed that China over-fulfilled its 2016 goal of decreasing capacity by 45 million tons, phasing out 65 million tons last year.

The added reductions claimed so far this year would raise the total of capacity cuts to nearly 100 million tons.

But that would still be less than 30 percent of the surplus cited in 2016, leaving plenty of slack for steelmakers to boost production in response to higher prices from the government’s stimulus spending, infrastructure investment and the real estate boom last year.

Study casts doubts

A study released by the environmental group Greenpeace East Asia in December casts doubt on whether China’s steel industry even cut as much capacity as targeted in the original 2016 goal.

The study compiled by industry consultants Custeel E- Commerce Co. found that the totals included capacity that was already idled. Fifty-four million tons of production was restarted to take advantage of higher prices, while 12 million tons of new capacity was added, it said.

If the findings are correct, China raised capacity by 36.5 million tons last year instead of reducing it. An increase of that size would also offset all of the cuts that have been claimed for this year.

As a result, China’s capacity surplus may still be as large as it was before the government’s downsizing initiative started.

Last year, China’s Foreign Ministry also claimed that the country had reduced capacity by 90 million tons during the previous five years, but according to figures from the China Iron and Steel Association and MIIT, capacity climbed by more than 70 percent since 2008.

Derek Scissors, an Asia economist and resident scholar at the American Enterprise Institute in Washington, said that China’s claims of capacity cuts have come from the government rather than producers.

“There are a number of ways firms and provinces can claim to be reducing capacity, for example, counting idle or planned capacity, without doing so,” said Scissors.

“The production numbers show capacity is not being cut. Claims that it is are just government propaganda,” he said.

Government accounting problems

Recent official and state media reports have acknowledged problems with the government accounting.

Participants at last month’s State Council meeting “decided to eliminate illegal production that adds to overcapacity and prevent production occurring after shutdowns from flaring up again,” China Daily reported.

Xinhua said in May that some firms could be “bowing to government pressure (and) could just halt production temporarily to meet their assigned tasks, instead of seriously eliminating capacity.”

In March, another statement by the National Development and Reform Commission (NDRC), the government’s top planning agency, said that “steel overcapacity has not been reversed fundamentally and the recent price rally could result in vulnerabilities,” according to Xinhua.

The NDRC cited the impact on jobs and finances as reasons for more gradual capacity reductions.

“Given the obstacles, such as unemployment and debts, the drive cannot be completed in one fail (sic) swoop—it requires resilience, composure, and innovation,” said the agency, as quoted by Xinhua.

Last year, the government predicted that 1.8 million jobs would be lost due to capacity closures in the steel and coal industries.

The government says it paid out 30 billion yuan (U.S. $4.4 billion) to support 726,000 laid off workers in the two industries last year and plans assistance for 500,000 more in 2017.

While the government has repeatedly argued that current steel production and capacity levels are unsustainable, it has promoted major investment initiatives that may make steelmakers resistant to downsizing in the long term.

China’s ambitious “Belt and Road” trade infrastructure program and the Xiongan New Area project to develop a new city center in Hebei province south of Beijing are both seen as opportunities to utilize more steel.

Last month, China Daily reported that the Xiongan development is expected to spark a “building materials boom.”

In a May 18 editorial, The New York Times also cited the capacity issue as one of China’s motives for pursuing the Belt and Road strategy.

“China itself is eager to open new markets to nourish its own growth and to absorb an overproduction of steel, cement, and machinery,” it said.


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