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.
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.