China Speeds Steel Cuts As Pressures Rise – Analysis

By Michael Lelyveld

China has announced plans to meet targets for downsizing its steel industry two years ahead of schedule in an apparent signal that there will be no more cuts in production capacity after 2018.

On Feb. 7, the Ministry of Industry and Information Technology (MIIT) said in a statement that China will reach targets for trimming surplus steel capacity this year instead of in 2020, Reuters reported.

In January 2016, Premier Li Keqiang first pledged to reduce overcapacity in the bloated steel sector by 100 million to 150 million metric tons without specifying a date.

In official statements and state media since then, the government’s goal has been reported as 150 million tons by 2020.

According to MIIT statements, China has already closed at least 115 million tons of outmoded and excess capacity.

In 2016, the industry reportedly exceeded its goal of 45 million tons for the year, shutting down 65 million tons of capacity. Last year, it reached the annual target of 50 million tons by the end of August, the ministry said.

The size and pace of the cuts has been closely watched because China produces nearly half the world’s crude steel with the capacity to make far more.

China’s overcapacity has been a source of international tension for well over a decade, sparking complaints from foreign steelmakers over low prices, hidden subsidies and unfair export competition.

Last April, U.S. President Donald Trump ordered an investigation into whether steel imports from China and other countries pose a national security risk.

Trump is scheduled to decide on possible trade measures for steel imports by April 11, 90 days after a Commerce Department report was submitted under the rarely-used Section 232 of the Trade Expansion Act of 1962. A similar decision is pending for aluminum on April 19.

Commerce Secretary Wilbur Ross has recommended a choice from among three options on steel. These include a 24-percent tariff on imports from all countries, a 53-percent tariff on steel from China and 11 other countries, combined with quota restrictions on other exporters, or quotas on imports from all countries.

On Feb. 17, China’s Ministry of Commerce (MOC) called the U.S. finding of a national security threat “groundless” and warned of retaliation.

“If the United States’ final decision affects China’s interests, we will take necessary measures to defend our rights,” said Wang Hejun, head of the MOC trade remedy and investigation bureau, as quoted by the official Xinhua news agency.

Restricting steel production

But China also has reasons of its own for tightening up on steel, which has been a major source of coal consumption and smog.

Last March, central government and municipal authorities unveiled plans to restrict steel production in northern areas surrounding Beijing during the winter heating season starting Nov. 15, reducing output by half at most mills.

The limits appear to have helped Beijing to avoid a repeat of last winter’s smog crisis, but the controls will be lifted on March 15, opening the door to a surge in production again.

On Monday, Reuters reported that Tangshan city in Hebei province is considering a draft plan to extend the restrictions for some capacity until November to help reduce smog.

It is unclear whether the extension will take place or whether other steelmakers would boost production in response.

But even with the winter cutbacks, China’s crude steel production rose 5.7 percent last year to a record 831.7 million tons, according to the National Bureau of Statistics (NBS).

China’s capacity cutting has only a tangential effect on production, primarily because its overcapacity has been so huge.

For years, state media reports have highlighted China’s capacity cuts without quantifying the total size of the industry’s production capacity.

But in April 2016, a senior MIIT official said China’s capacity stood at 1.13 billion tons, Reuters reported at the time. The total leaves 326 million tons as surplus, based on NBS production figures for 2015.

As a result, China’s targeted cuts of 150 million tons would eliminate only 46 percent of its excess, allowing steelmakers to set records for output despite the capacity reductions.

The extent of the downsizing makes it critical to know whether China’s announcement on achieving the target means it has no plans to do more.

So far, China is celebrating the results of its policies, since the cuts have had a psychological effect on the market, returning the industry to profitability.

“Steel prices soared on expectations that supply would tighten due to capacity cuts,” the official English-language China Daily reported, citing a jump of more than 50 percent for benchmark rebar last year.

But the policies have done little to address foreign complaints about China’s production volumes and market dominance.

Last year, China’s global market share for crude steel rose to 49.2 percent from 49 percent in 2016, the World Steel Association said.

Since 2016, the capacity cuts have actually encouraged more production as some steelmakers reopened closed lines to take advantage of higher prices.

In recent weeks, MIIT has issued tough statements on keeping capacity in check without ruling out possible production increases.

On Jan. 8, the ministry said it would require steelmakers to eliminate 1.25 tons of old capacity for every new ton of modern capacity they add this year.

“We will strictly forbid any new steel capacity to be launched and make sure all outdated steel capacity is eliminated and prevented from reopening,” the ministry pledged in an earlier statement.

But the country’s biggest producer, state-owned China Baowu Steel Group, has already announced plans to expand in the longer term as smaller private competitors are pressured to shut down, the South China Morning Post reported in September.

Baowu Steel has targeted an increase in capacity from 60 million tons to 100 million tons, the company’s general manager said.

Impact of the cuts

Derek Scissors, an Asia economist and resident scholar at the American Enterprise Institute in Washington, said the impact of China’s cuts depends on what it plans to do next.

“The Chinese steel sector was 35 percent to 40 percent oversized,” Scissors said. “Now it may be only half that. The bloat was so bad that capacity cuts have had no visible effect on production, but they still needed to be made.”

“If Beijing now declares victory and the industry goes back to business as usual, the whole program was a farce,” he said.

“If they make no further capacity cuts but prevent re-expansion, the true target was only consolidation of larger state-owned enterprises, as the central government has long wanted,” said Scissors.

“But there’s at least more of a chance to actually shrink steel now than there was in 2014,” he concluded.

While much may depend on the psychological effects of the numbers, there are several reasons to doubt the numbers themselves.

Last year, a study sponsored by Greenpeace East Asia found that 54 million tons of operations that were claimed as capacity cuts in 2016 had restarted due to price increases.

It is unclear whether the government has continued to count such temporary closures in its totals of shutdowns.

Another analysis by the Peterson Institute for International Economics argued that 200 million tons of spare capacity was reasonable for China’s steel industry to respond to market fluctuations. But it also said that officials had mixed iron and steel together in their reports, making it unclear whether the goals for crude steel have been met.

China has also claimed gains in ending 140 million tons of illicit production of substandard steel made with induction furnaces using scrap metal. The products are not included in the steel capacity cut totals, although they affect prices and smog-producing emissions.

Whether the production has been permanently eliminated may be open to question.

A posting by S&P Global Platts news service last year raised doubts about whether the illicit production could be removed from the market.

“Induction furnaces have been a thorn in the eye of Chinese steel industrial policy since 2002, but have largely been successful in evading measures,” the report said.

“The more underground, home-brew operations play a cat-and-mouse game with the authorities. They simply dismantle facilities quickly before inspections, and assemble them again after,” it said, quoting “market participants.”