Global steel overcapacity assuming crisis proportions

Steel industry looking to government for help

Global steel overcapacity is increasingly gaining the attention of government agencies and international bodies. On April 13 and 14, a joint hearing on the subject was held before the Office of the United States Trade Representative (USTR) and the U.S. Department of Commerce (DOC) with the participation of other U.S. government agencies and interested stakeholders. Just a few days later, on April 18, a high-level symposium on global steel overcapacity was held by the Organization for Economic Cooperation and Development (OECD) in Brussels. The U.S. steel industry is buckling under current global steel conditions. Imports have captured 29 percent of the U.S. market while capacity utilization for the domestic industry has dropped below 70 percent. Prices for hot roll steel have dropped 47 percent between September 2014 and December 2015. The upshot if that 12,000 U.S. steelworkers have lost their jobs in the last couple of years. U.S. industry executives blame the crisis on market-distorting behavior by other countries, China primarily but not exclusively.  The OECD, in a recent report, concluded that “the growing gap between global steelmaking capacity and demand has led to deterioration in the financial situation of steelmakers, and has raised concerns about the longer-term economic viability and efficiency of the industry….Globally, the steel industry’s financial situation is weaker than it has been in years, and the industry is faring even worse than during the last steel crisis of the late 1990s.”  “I have been in the steel industry for 31 years, and I have never seen the conditions in the marketplace that we have experienced over the last two years,” said Roger Newport, CEO of AK Steel. “The huge disparity between global steel capacity and demand was created largely by government policy,” said Philip Bell, president of the Steel Manufacturers Association (SMA). “It is unrealistic to assume that market forces alone can eliminate this disparity.” A similar argument is made in a new report released by the international trade practice of the Wiley Rein law firm which argues that government intervention is required to address the ills that plague the U.S. steel industry.  Growth in 2017? It may not exactly be light at the end of the tunnel, but some hope is provided by the World Steel Association (WSA) which forecasts that world steel demand will return to growth in 2017. Admittedly, it is modest growth of only 0.4 percent, but it is better than 2016’s forecasted contraction of 0.8 percent. Global steel demand fell by a full three percent in 2015. The 2017 numbers look better when demand from China is excluded: in that case, demand will grow by 1.8 percent in 2016 and 3.0 percent in 2017, according to the Worldsteel forecast.  Emerging economies in South and Southeast Asia such as Thailand, Malaysia, Vietnam, Indonesia, and the Philippines will drive the growth in steel demand, according to Worldsteel, and NAFTA and the EU will support its recovery. Steel demand is also expected to grow in Turkey, by 3.3 percent in 2016 and 3.2 percent in 2017. The deceleration of the Chinese economy looms large in the steel overcapacity picture. The country is experiencing a severe depression in construction activities and slower growth in the automotive sector, conditions which are not expected to change in the near future. Worldsteel expects the decline in steel demand in China to reach four percent in 2016 and three percent in 2017. Demand in the formerly burgeoning economies in Brazil and Russia is also expected to contract strongly in the period ahead.   “The global steel market is suffering from continued weakness in the manufacturing sector,” noted TV Narendran, chairman of the Worldsteel economics committee. Exacerbating the slowdown in the demand for steel in China is the enormous capacity that was built up in that country when it was growing at boom rates. U.S. steel industry leaders say China is using that excess capacity to dump cheap steel into the U.S. market.  “Global steel overcapacity driven by foreign government subsidies and other interventionist policies has led to high levels of dumped and subsidized imports in the U.S. market,” said Thomas Gibson, CEO of the American Iron and Steel Institute (AISI).  “It is easy, and correct, to point to China as the main culprit,” added Jim Baske, CEO of ArcelorMittal North America. “But it is not just China. We face challenges from countries as diverse as Korea, Russia, Turkey, and others.” All agree that China is the major contributor to the capacity glut. China’s economic slowdown yielded an estimated 425 million tons of excess capacity. “Basically, the Chinese government is a company disguised as a country engaged in economic warfare,” said Chad Utermark, executive vice president of steelmaker Nucor Corporation. Government Response  A number of approaches have been put forward to restructure the global steel industry, all of which require government intervention. Worldsteel proposes that “governments should guide the direction of a swift and timely restructuring by developing long term industrial strategies in collaboration with the steel industry. Regulatory market oriented approaches should ensure survival of the fittest producers. Inefficient producers should not be subsidized to remain in operation. Barriers to exit that delay restructuring should be removed in an orderly and timely way.” The AISI and SMA agree that the U.S. government should respond to the capacity glut by vigorously enforcing U.S. trade remedy laws, securing commitments from other countries to eliminate steel overcapacity, and secure commitments from all steelmaking countries to eliminate and not introduce subsidies and other market-distorting policies related to steel.  “Strict enforcement of the antidumping and countervailing duty laws will ensure that imports compete with domestic steel production on a fair basis,” said SMA’s Bell. “In this respect, it is essential that the United States continues to treat China as a nonmarket economy for antidumping purposes until China can establish, under U.S. law, that it is entitled to market economy treatment.” In addition, Bell proposes strict limits on multilateral and export bank lending on steel projects. “Lending by multilateral development organizations and national export banks has been another significant source funding capacity expansion,” he explained. “An international agreement should strictly limit such multilateral and national lending on steel-related projects.”