China Stalls On Steel Capacity Cuts – Analysis
By Michael Lelyveld
China is fighting international pressure to speed up its timetable for shutting down surplus steel plants despite warnings that a temporary price surge will collapse by next year.
The country has been promising for the past decade to cut its huge production overcapacity, which competitors blame for depressing world steel prices and environmentalists cite for energy waste and smog.
Last year, China made 803.8 million metric tons of crude steel with production capacity of 1.13 billion tons, according to the World Steel Association and the Ministry of Industry and Information Technology (MIIT).
China’s steelmaking capacity may actually be higher than that.
In April, an MIIT official told a conference that “some dead capacity” was not included in the ministry figure, Reuters reported. The previous capacity estimate was 1.2 billion tons.
China’s overcapacity of at least 326 million tons exceeds the combined output of the second, third and fourth-ranked producers—Japan, India and the United States.
A decade ago, China made less than one-third of the world’s steel. Last year, the country produced nearly half of global output, but the domestic industry lost 64.5 billion yuan (U.S. $9.6 billion), according to the China Iron and Steel Association (CISA).
China’s government has responded to international trade complaints, anti-dumping measures and tariff penalties by setting tougher targets for capacity cuts, freezing licenses for new projects and pledging to kill off “zombie” companies that have been kept alive by easy bank loans.
But despite claims of shedding 90 million tons of capacity by the end of last year and promises to cut another 100 million to 150 million tons by 2020, some production lines have reopened this year to take advantage of short-term price gains.
In March, analysts warned that some 160 million tons of steelmaking capacity had come back online in Tangshan, a northeast industrial center in Hebei province.
Recent reports cite firming prices due to economic stimulus spending and supply disruptions caused by widespread flooding.
But a Goldman Sachs & Co. report this month warned that China’s steel demand will fall 2 percent in both 2017 and 2018 after rising by 1 percent this year, eventually contracting by as much as 20 percent, Bloomberg News said.
Hopes for higher prices rose again this month after the Tangshan local government ordered heat treating plants to cut production in the second half of July to meet environmental targets, Reuters reported.
But the central government and the industry have both shown signs of resistance to change.
On July 6, Ministry of Commerce spokesman Shen Danyang denied that China encourages steel exports, arguing that its output “primarily meets domestic demand” and that the government has raised export tariffs on “some products,” the official English-language China Daily reported.
But five days later, China’s General Administration of Customs reported that steel exports in June had risen to their second-highest monthly level on record, according to Reuters.
First-half steel output of 399.5 million tons edged down 1.1 percent, but June production of 69.5 million tons rose 1.7 percent, the National Bureau of Statistics (NBS) said.
The EU’s stance
After meeting with officials in Beijing on July 13, European Commission President Jean-Claude Juncker said the European Union is considering new steps to guard against unfair competition.
“The EU will defend its steel industry. We are not defenseless and we will use all the means at our disposal,” said Juncker, Agence France-Presse reported.
Juncker said the EU could delay granting China “market economy status,” which Beijing has been seeking to reduce anti-dumping measures and tariff barriers to trade.
At a meeting with German Chancellor Angela Merkel on July 16 during the Asia-Europe Summit in the Mongolian capital Ulan Bator, Premier Li Keqiang urged the EU to approve market economy status for China by December, the date set by the country’s accession accord with the World Trade Organization in 2001.
Last week in Brussels, EU commissioners discussed compromise rules for higher trade penalties in “extreme” dumping cases but left the outcome unclear.
“China is not a market economy,” EU Trade Commissioner Cecilia Malmstrom said, as quoted by Reuters. “We are not granting it market economy status. If it were a market economy, it wouldn’t have the problems we are seeing.”
The Juncker threat contrasted sharply with milder responses to the steel problem that China has endorsed.
At a G20 meeting in Shanghai on July 10, trade ministers of the major economies approved a carefully orchestrated statement that avoided blaming the host country for the world steel glut.
“We recognize that excess capacity in steel and other industries is a global issue which requires collective responses,” the statement said.
In April, a Ministry of Commerce spokesperson took a similar line, arguing that “weak global demand and the economic slowdown were the culprits” responsible for the surplus, rather than China’s excess capacity, the official Xinhua news agency reported.
“China doesn’t have a problem saying there’s an overcapacity problem. They just don’t want China to be singled out for the overcapacity problem,” said Derek Scissors, an Asia economist and resident scholar at the American Enterprise Institute in Washington.
Scissors said China has called for steel capacity cuts since 2004, but it has also been manipulating its capacity figures for years.
While China claims to have cut 90 million tons of capacity under its 12th Five-Year Plan through 2015, its capacity actually rose because steelmakers opened new plants and production lines faster than they closed old ones.
In January, the cabinet-level State Council first said it would reduce capacity by 100 million to 150 million tons without setting a deadline, Xinhua reported at the time.
In February, the council issued a second statement, promising that the cuts would take place “over the next five years.”
Subsequent official reports have referred to a 10-percent capacity cut by 2020. But some officials have also suggested that the targets for downsizing should be raised.
“If production stays at 800 million tons, then we need to cut 200 million tons for the situation to become acceptable,” said Luo Tiejun, identified by Reuters as vice head of MIIT’s raw materials department.
Call for deeper cuts
On July 8, a statement by the State Council’s State-owned Assets Supervision and Administration Commission (SASAC) called for faster and deeper cuts by state-owned enterprises (SOEs) in the steel and coal sectors, suggesting that the industry-wide targets were not high enough.
Steel and coal SOEs should eliminate 15 percent of their capacity in the next five years, Xinhua quoted SASAC as saying.
Twenty-five SOEs were asked to reduce capacity by 10 percent within two years “to set examples for private enterprises in dealing with overcapacity,” the agency said.
But the progression of targets will be hard to evaluate as long as plants reported as shut can be restarted at will.
“The Chinese have been promising steel cuts for more than a decade. Tinkering with the cuts you’ve promised but never implemented should not impress anyone,” said Scissors.
“Overcapacity has expanded since this government started addressing the problem of overcapacity,” he said.
Even the accelerated targets for capacity cuts among SOEs may do little to affect the world steel market, given the size of the surplus, which is now about twice as large as the planned reductions by 2020.
Worries at the local level
Worries about unemployment and social stability in China lie at the heart of the capacity problem, particularly at the local level.
The government has estimated that 500,000 workers will lose their jobs in the iron and steel industry, which employs 4.2 million, under the schedule of capacity cuts outlined in January.
Officials have given no new estimate of job losses under the accelerated cuts for SOEs urged by SASAC this month.
While the losses are considered manageable for overall employment at the national level, they are a major concern for the industrialized provinces where steel mills are concentrated.
“It’s not an aggregate labor market problem. It’s a subnational labor market problem,” said Scissors.
“No provincial governor wants to be saddled with hundreds of thousands of people that he can’t re-employ coming out of his steel sector,” he said.
In February, the central government announced a fund of 100 billion yuan (U.S. $15.3 billion) to support resettlement costs over two years for the 1.8 million workers expected to be laid off in the steel and coal industries, but it has yet to estimate the total of job losses from other overcapacity industries and planned SOE reforms.