Category Archives: China-E.U.

China’s Steel: The Big Chill

CHINA’S STEEL INDUSTRY is huge — and its proposed restructuring is a commensurately massive task. The State Council has approved a cut in steel production capacity by 100 million-150 million tonnes over an unspecified time frame, part of a broader plan to reduce industrial capacity as the economy slows its growth rate and rebalances towards consumption-led growth.

In the steel industry’s case, with demand in China shrinking for the first time in a generation in what is a structural not cyclical change, that could cost as many as 400,000 jobs, according to Li Xinchuang, head of the China Metallurgical Industry Planning and Research Institute. To put that in context, the iron and steel sectors employ more than 6 million people, accounting for some 4% of total industrial employment.

However, even production cuts on the scale proposed would be sufficient to remove only one-third to one-half of the estimated overcapacity in the industry. The new five year-plan is said to target a reduction in the industry’s annual production capacity to 700 million tonnes from the current 1.2 million tonnes.

Meanwhile, China’s steelmakers have found themselves in the middle of an unexpected trade spat with the United Kingdom, whose own small steel industry is facing the loss of one of its storied steel plants, Port Talbot, now owned by Tata Steel, with the finger of blame pointed at China for the effect its overproduction has had on depressing world steel prices.

When China started industrializing in 1980, it produced less than 40 million tonnes of steel a year, accounting for 5% of global steel output. Last year, it produced 804 million tonnes, just shy of one-half of world output, according to the World Steel Association’s data.

Crude steel production, China vs rest of world, 1980-2015 '000 tonnes

As the chart above of China’s crude steel production against that of the rest of the world’s shows, China’s steel output took off a decade or so ago. Annual production has now tripled from 2003’s level, peaking at 832 million tonnes in 2014.

However, China cannot consume all the steel it is producing, although it is important to note that it is not self-sufficient in many types of speciality steels in particular, of which it imports 20 million tonnes a year.  Moving into high-end steelmaking is the direction in which the industry will be pushed by policymakers, to meet the increasing needs of the advanced engineering industries such as aerospace that have been designated at China’s industrial future.

However, this year, crude steel output may drop for the second successive year, to 783 million tonnes, on official estimates. The domestic property market, a significant customer, has slumped and infrastructure spending has been reined in. 

China still consumes the equivalent of about 45% of global steel production, so it has increasingly turned to export markets, particularly the U.S and the E.U., to rid itself of its surplus stocks. Chinese steel makers sold more than 100 million tonnes abroad for the first time last year, a 20% increase on 2014’s export volumes which were themselves, double the previous year’s level.

With Russia and Ukraine also turning aggressive exporters, it is not surprising that global steel prices have slumped to their lowest levels in more than a decade, with the depreciating yuan making Chinese steel even cheaper for foreign buyers. A tonne of steel billet sold for more than $500 a tonne at the start of 2012; today it sells for $50 a tonne.

Wherever China’s export prices lie in the inevitable chicken-or-egg argument, the world’s steel industry is in disarray. Angang Steel Co., China’s fourth-largest mill, warned that not just China’s but the global steel industry’s crisis has become so severe that it’s comparable to a new ‘Ice Age’. 

Angang, like China’s other big mills, has just announced an annual loss for last year, in its case of 4.59 billion yuan ($710 million), compared with a profit a year earlier. Overall, the Chinese steel industry recorded estimated losses of $12 billion last year, making it an easy target for those that accuse it of using state subsidies to let it dump steel at below cost on world markets.

The U.S.and the E.U. have initiated anti-dumping investigations against Chinese steel exports, prompting tit-for-tat anti-dumping tariffs including the newly announced ones on the grid-orientated electron steel (GOES), used in power and audio transformers, from the E.U., U.S. and South Korea. Japan, South Korea and India have also initiated anti-dumping complaints against Chinese steelmakers.

The bigger political concern for Beijing is not being caught in a trade skirmish with the UK, whose loss-making steel industry is only one of those within Europe that feels it has been battered by China’s cheap exports, but that it may put the  determination of whether or not China is a ‘market economy’ under World Trade Organisation rules at risk. The E.U. still has to decide its position on the issue, which has broad implications for how China would be treated in anti-dumping disputes.

The even bigger concern for Beijing is the risk of domestic social unrest  sparked by large-scale layoffs not just in the steel industry but across its heavy industry.  The coal, cement, aluminum and glass industries are all facing similar restructuring. As we have noted before industrial unrest is on the rise. In one of the latest incidents, hundreds of steel workers in Tangshan in Hebei province demonstrated in support of their demands for payment of wages after their plant was closed, according to the China Labour Bulletin, a Hong Kong-based labour activist group.

Social unrest, not trade policy, will be Beijing’s priority.

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It Is An Ill Wind That Blow’s China’s Nuclear Industry No Good

CHINA’S STATE-OWNED heavy engineering firms are getting a liking for European renewables. China General Nuclear (CGN) Corp. has beaten out several rivals to acquire a controlling stake in three U.K. wind farms being sold by the French utility EDF.

This follows China Three Gorges Corporation acquisition of wind-generation capacity in Spain and Portugal to add to that it has in Pakistan. The State Administration of Foreign Exchange (SAFE), which also supervises CGN, owns 49% of the portfolio of wind assets belonging to the Norwegian state owned electricity company, Statkraft. This stake is held through SAFE’s U.K. investment arm, Ginko Tree Investment.

CGN, which generates more than half of China’s nuclear energy and was known as the China Guangdong Nuclear Power Group until last year, paid an estimated $157 million for 80% of the three wind farms. EDF will retain the remaining 20% and continue to operate the facilities.

The three farms, all in eastern or north eastern England, are CGN’s first significant acquisition of onshore wind generating capacity outside China. It has a small interest in an Australian wind farm but set up a subsidiary earlier this year to acquire off- and onshore wind farms and solar projects in Europe. The U.K. government runs a subsidy scheme that requires energy utilities to buy a certain amount of electricity generated by renewables, which makes U.K. projects an attractive investment.

The generating capacity that CGN will be acquiring is relatively modest at 72 megawatts, sufficient to serve only 40,000 homes. By way of comparison, the group has installed generating capacity of some 7 gigawatts of solar, hydro and wind power in China plus 11.6 gigawatts of nuclear power.

Not that China’s nuclear companies are turning their back on nuclear despite industry’s post-Fukushima hiatus. CGN has another 3.9 gigawatts of capacity under construction in China and is involved in the negotiations over Hinkley Point C, a new $40 billion nuclear power plant EDF is planning to build in the west of England. That would be the first nuclear power plant built in Britain in a generation. CGN and China National Nuclear Corporation also want to build another nuclear plant in eastern England that would controversially use a Chinese built reactor.

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China And The EU Drift Towards A Solar Trade War Neither Wants

Politics is complicating the trade dispute between China and the EU over solar panels. Meanwhile, the two are drifting towards a trade war neither wants.

Last September, the European Commission launched an anti-dumping investigation in to China’s $25 billion-worth of solar panel exports (2011 sales) to Europe. Beijing made a tit-for-tat response, threatening duties on EU exports of polysilicon, which is used in making solar panels.

Which is pretty much where things still stand. China’s leadership transition and the likely departure of trade minister Chen Deming in March has left everything in stasis.

Yet the trade disputes clock is ticking down. Beijing is to due to make a decision on polysilicon duties by the end of this month. The outcome of the EU investigation has to decided by mid-April so EU officials can make a formal recommendation in June to the European Commission on how to proceed.

These investigations overwhelmingly lead to the imposition of anti-dumping duties (only in one case over the past four years has it not), though EU leaders have shown no appetite to follow the U.S. in imposing duties on Chinese solar products. They don’t want any retaliation that might make recovery from Europe’s recession more difficult.

Yet there is no wiggle room in the European timetable. That will not leave much time for a new trade minister in Beijing to get his feet under the table, let alone negotiate a resolution to what is anyway a tricky trade dispute.

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China Will Be Exacting Contributor To Euro-Bailout

China’s contribution to the euro-zone’s would-be 1 trillion euro bail-out fund, the European Financial Stability Facility (EFSF), will likely be more token than substantive. The head of the fund, Klaus Regling, is in Beijing with his collecting tin, but while he will find his hosts wishing to be internationally cooperative, he will also find them risk-adverse and somewhat divided on how much China should contribute. Some would prefer to contribute through the IMF, where China could extract some political return, which will also be expected but more difficult to achieve if Beijing contributes directly to the EFSF. The are also still some burned fingers in Beijing from earlier foreign investments to diversify its foreign exchange reserves from U.S. government paper. The unresolved details of Europe’s plan gives Beijing the necessary excuse not to be rushed into committing itself to anything just yet and the time to work on some quid pro quo, probably on the trade and technology transfer fronts.

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China-E.U. Trade Relations Turn Rocky

Two days after the E.U. said it was imposing its first countervailing anti-subsidy duties against China, on coated fine paper, the Ministry of Commerce says China will apply anti-subsidy duties in respect of E.U. subsidies given to potato starch products. Unlike many of the tit-for-tat trade retaliations between China and the U.S., both moves are commercially significant, and will exacerbate the political tension between the two.

China-E.U. trade has been growing rapidly, reaching $480 billion in 2010, but, as China’s exports start to move up the value-chain, under the E.U.’s newish hard-line trade commissioner, Karel de Gucht, Brussels is now focusing on what it perceives to be Chinese subsidies that result from a range of policies from direct state financial support to indirect assistance such as favorable borrowing terms and land grants. This could get very rocky.

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Renault Affair Is New Face Of National Rivalry

Is the Chinese auto industry behind the alleged theft of industrial secrets from the French automaker, Renault? Bernard Carayon, the French lawmaker from President Nicolas Sarkozy’s conservative party who heads parliament’s working group on economic intelligence, thinks there is reason to believe so, citing “proven, diverse and reliable” sources. Sarkozy, himself, has reportedly put the French intelligence services on the case. Three Renault executives, reportedly including one of its management committee, are accused to selling proprietary technical information about the engines and batteries for the electric cars on which the carmaker has bet its future to the tune of a $5 billion investment with its partner, Japan’s Nissan. The three executives have been suspended and face legal action, the company says. (Update: Renault said at the weekend that it has lost no critical technical or strategic information, only design and cost details. Via Deutsche Welle.)

Clean technologies in general and electric cars in particular are seen as a market in which Chinese companies can establish leadership. In 2007, a Chinese student on work placement with Valeo, a French clean-technology industrial group, was jailed by a French court for obtaining confidential documents from the company. Valeo now builds the power trains for electric cars it is developing with Beijing Automotive.

China is widely suspected in the West of indulging in widespread state-backed industrial espionage, the dark side of Western multinationals’ private grumbling that Chinese companies are draining them of technology in return for access to the Chinese market. China’s industrial development may be moving long-term from imitation to innovation, but the old habits are dying hard.

What makes that more difficult for multinationals is the way nation states’ expression of hard power is becoming more dependent on economic strength. Rivalry between nations is increasingly being framed in terms of economic competition, trade and investment jockeying, cyberwarfare and corporate espionage. This is happening when the leading, most technologically laden multinationals are becoming more global and less rooted in the nations from which they were born.

There is also a domestic French political dimension to the Renault case. If China’s involvement is established, it is likely to set back Sino-French relations. They hit a low point two years ago when Sarkozy criticized Beijing’s policy on Tibet before President Hu Jintao’s visit to Paris bearing a raft of Chinese buying orders late last year restored the equilibrium. Another downturn would make for a rough year for Sarkozy’ presidency of the G-20. He needs needs Beijing’s cooperation on issues from global governance to climate change for the successful high-energy presidency that is seen as a necessary precursor for his reelection as France’s president in 2012.

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U.K. Honours China Service

Our man in London with his fingers on the ermine sends us a list of the Queen’s New Year Honours, the U.K. establishment’s annual recognition of its great and good. He notes a dozen on the Diplomatic and Overseas List that are China-related, more than for any other country.

They give an albeit unscientific sampling of what Britain, at least, considers “extraordinary and important service” rendered by some of its citizens in fields as wide-ranging as diplomacy, commerce, the arts and social services. The Shanghai Expo stands out in that regard. Our man’s list excludes honours awarded to U.K.-based officials whose daily round may be directly Sinocentric. Our congratulations (and so you can offer yours, should you so wish, if and when you run into them) to those who are elevated to:

CMG (Companion of the Order of St Michael and St George)

ELLIOT, Ms Caroline Margaret, O.B.E., H.M. Consul-General, Shanghai.

FEATHERSTONE, Simon Mark, lately Director, Shanghai Expo 2010, Foreign and Commonwealth Office.

CBE (Commander of the Order of the British Empire)

MARGOLIS, Richard Paul, Regional Director, North East Asia, Rolls Royce. For services to UK business in China.

OBE (Officer of the Order of the British Empire)

CLARK, Nigel, lately Chairman, British Chamber of Commerce, Beijing. For services to UK/China commercial interests.

HALLETT, Stephen Walter Garnier, Director, China Vision. For services to disadvantaged groups and increasing understanding of disability issues in China.

LEE, Ms Bernice Wingi Yee, Research Director, Energy, Environment and Resource Governance, Chatham House. For services to UK/China climate change co-operation.

SMITH, Nicholas Michael, Director, International Festival Chorus and Peking Sinfonietta. For services to music and to UK/Sino relations.

THOMPSON, Professor Kevin, Director, The Hong Kong Academy for Performing Arts. For services to the Arts and to UK/Hong Kong cultural exchanges.

MBE (Member of the Order of the British Empire)

MILES, Lorna Marie, Mrs., lately Pavilion Director, UK Pavilion, Shanghai World Expo 2010.

OLIVER, Rosalind Stephanie, Mrs., Director, Double Dragon Alliance, Shanghai. For services to the promotion of cross-cultural understanding, particularly between the UK and China.

WAKELING, Susan Jean, Mrs., lately Learning Centre Manager and Teacher, Guizhou. For services to special needs and disabled children in China.

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