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.

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.

Jobs’ Challenge To Slowing Growth

THE ECONOMY CONTINUES along its glide path to slower growth. Last year’s GDP growth target of ‘about 7%’ has been replaced by 6.5%-7% for this year. Announcing this to the National People’s Congress (NPC), Prime Minister Li Keqiang warned that the rebalancing of the economy towards consumption-driven growth faced challenges and tough times ahead.

One of those will be keeping unemployment ‘within 4%’ – of a workforce of more than 800 million that has been adding 12 million jobs a year for the past five years and faces an unusually high number of 15 million new graduates joining the workforce this year.  A detailed reading of the 13th Five-Year Plan, the economic development blueprint to 2020 due to be approved by the NPC, will provide some insight into how that will be done.

The official unemployment rate was 4.05% in the second half of last year.

Like any economy deindustrialising, China has to bear a heavy burden of workers left without jobs or the skills to get new ones. At least 3 million jobs, or 30% of the workforce, could go from heavy industry as a result of cutting surplus production capacity. The bulk of those redundancies will fall on the coal and steel industry. Human resources minister Yin Weimin says that 1.8 million jobs in those industries, an estimated 10-15% of the workforce, are at risk.

With that comes the possibility of social unrest and thus a threat to Party rule based on the premise of delivering ever higher living standards. The number of strikes and protests by workers, at more than 2,700 last year, was more than double 2014’s number, according to the China Labour Bulletin, a Hong Kong-based civic group.

The response has been carrot and stick — a crackdown on labour activists and non-governmental organization to snuff out any political nexus forming and financial measures such as the 100 billion yuan ($15.3 billion)  to be given to local authorities ‘solve the problem of worker placement’ under the umbrella an industrial enterprise restructuring fund.

The stick, though its use is well practiced, is not without hazard. Overzealous suppression of labour unrest could cause the Party itself to become a target of worker anger, and especially in provinces such as Guangdong, where local officials have traditionally held a relatively tolerant attitude towards labour relations but where several labour activists were arrested in January and put on trial as ‘foreign subversives’.

The only officially sanctioned trade union, the All-China Federation of Trade Unions (ACFTU), has recently reformed itself to stress its role as an instrument of Party and government and to straighten its top-down control over its local unions. This could have the unintended consequence of turning disgruntled workers more towards unofficial channels.

So far, though, labour disputes are overwhelmingly economic, not political, and a Party leadership that puts a premium on maintaining stability will want to keep it that way.

There are risks in the carrot, too. Local governments already have a debt time bomb ticking quietly under them. For all the help they will get from Beijing, they will face immense fiscal pressure as growth slows to pay for dealing with shuttered mines and mills and factories and workers demanding unpaid wages (a chronic problem, particularly in the construction industry), redundancy pay and social security.

The pressures will be particularly acute in those areas where heavy industry is concentrated, notably the rust-belt of the northeast, in the export factories in the Pearl River delta, and where the reforms of state-owned enterprises bite hardest, particularly the proposed rationalization of ‘zombie’ companies hitherto kept afloat by local governments seeking to avoid job losses.

If more and more workers see the Party failing to look after their interests, the overarching risk is that their acceptance of the social compact that underpins the Party’ monopoly on political power will erode, which is what the Party is most set on avoiding.

This Bystander recalls a far more drastic set of state-sector reforms and sharply decelerating growth in the late 1990s.  If there is a ray of hope for the top leadership, it is that the Party got through that when it had fewer carrots and less sophisticated capabilities with its sticks.

China Starts To Curb Excessive Inventory

The cutback in steel and and cement production that Beijing has ordered can be read to mean that the economic planners are confident the re-acceleration of growth is soundly based. Or it can be seen as continuing concern that the over lending that has fueled this year’s growth needs to be reined in further still. Fixed-asset investment increased by a third in the first half of the year as banks made a record $1.1 trillion of new loans. Some of that money flowed into swelling industrial inventories. Steel production hit record levels in July, though the world is still in recession. China produces nearly half the world’s steel, but tons are being stacked uped in yards and on docks unsold, and depressing prices. The output curbs on steel and cement companies, as well as parts of the coal, glass and power industries, called for by the State Council is the demand counterpart to the supply constrictions being imposed directly on the banks.

The Battle For China’s Steel

The Economic Observer says the investigation into the leaking of China’s negotiating position at the iron-ore price negotiations earlier this year that has resulted in the detention without charge of four Rio Tinto employers has widened to include Baosteel, the largest steel company. (China Daily has reported that all 16 of the leading steel mills are implicated, though this remains unconfirmed.)

The Economic Observer also lays out the way the government stepped in to take control of this year’s annual price negotiations, dissatisfied that the individual companies were consistently getting the worse of each year’s deal, with the consequent impact on the economy of higher steel prices. By having the China Iron and Steel Association handle a collective negotiation, the government thought it could hold a tougher line on prices and stop the negotiating tactics leaking out by cutting the steel companies out of the picture. But what the Economic Observer suggests is that it was not price but quota size that mattered most to the larger steel mills. So secret side deals that have always taken place between the mills and the miners continued, and with them the mutually back-scratching relationships necessary to facilitate them. So in what has become a political power battle between government and the state-owned steel mills, officials are cracking down in the only way they know how, hard.

Steel Cuckoo

A first cuckoo of economic spring? Several steel mills have announced price increases ranging from 5% to 25% for a variety of products, the Asian Wall Street Journal reports.

Baosteel and Anshan Iron & Steel say that they will raise prices for hot-rolled coil steel. Baosteel also said it will increase production at some of its mills. Plans for the state to buy a steel stockpile have been dropped.

There is still plenty of excess capacity in the industry given the overall weakness of demand, and plans are afoot to address both, according to a Bloomberg interview with Li Xinchuang, vice president of the China Metallurgical Industry Planning and Research Institute. But steel is a bellwether because the metal is so widely used from car manufacturing to commercial construction to infrastructure — all the sorts of things that benefit from stimulus packages.

Vale Backs Down Over Iron Ore Premium

Baosteel Group, the country’s biggest steelmaker, says Cia. Vale Do Rio Doco, the world’s largest iron ore supplier, has dropped its demand for a 12% premium on its exports to China. The global slowdown has led to a slump in demand for Chinese steel at home and abroad — and piles of unused iron ore piling up at Chinese ports. Vale had already raised its annual contract price for 2008 by 70%, and most Chinese steelmakers are now losing money. So Vale’s threat to withhold supplies unless the premium was paid, initiated last July before the dramatic change in market conditions, had little sting (see: “Flat Output Will Help Steelmakers Strike Better Iron Ore Deals“)

The slump is likely to lead to widespread consolidation of the industry. In that regard, this caught this Bystander’s eye: Baosteel’s chairman Xu Lejiang says that his company is looking to promote “intensive cooperation” with Taiwan’s China Steel, Bloomberg reports. The Taiwanese company’s Chang Chi-juch says the two companies are looking to share their acquisitions expertise.

The comments come as Beijing’s top envoy on Taiwan affairs, Chen Yunlin, arrived in Taipei with a 60-strong delegation for talks to push for stronger ties across the Straits. He is the most senior official to go to Taiwan since 1949.

Aluminum, Copper Smelters Facing Same Slump As Steelmakers

Aluminum smelters and copper refiners are facing the same problems as China’s steelmakers. Slowing economic growth in their domestic and export markets is cutting demand for their products, lowering prices and squeezing profits.

The biggest aluminum smelters met commerce and finance ministry officials today to ask for tax breaks and purchases by the state reserve. Bloomberg reports that China’s aluminum prices have fallen 22% this year to less than the operating costs of domestic smelters. The slump in demand  comes on top of a 15% tax imposed on exports of aluminum alloys in August to curb over-investment in the energy-intensive industry.

Meanwhile, Chinalco Luoyang Copper, part of Aluminum Corp. of China, or Chalco, the country’s largest metals processor, said its orders had fallen 20% in the last quarter. Rivals have also cut production. The industry is thought now to be operating at 80% of capacity.

Demand and prices for all three metals may well continue to fall through to next year, which will send a lot of smaller producers out of business.

Flat Output Will Help Steelmakers Strike Better Iron Ore Deals

Confirmation of the problems in the steel industry comes from Shan Shanghua, secretary general of the China Iron and Steel Association (here via People’s Daily).

He says production will be flat this year at 500 million tonnes, revising the association’s previous forecast of 5%-10% growth. Nor does he expect output to grow next year. The world wide economic slowdown is to blame (see “Baoshan Steel Will Cut Prices, Again, As Demand Slumps“).

Shan was speaking at a conference in Qingdao that unofficially kicks off the annual price contract between Chinese steelmakers and their iron ore suppliers. As well as negotiating down record prices, the steelmakers want to overhaul the way prices are negotiated to unify the prices of imports from all countries, as Japan’s steelmakers do. The stalling of production growth, which has left 80 million tonnes of iron ore stacked up at Chinese ports, will give China’s steelmakers a stronger hand in those discussions.

Baoshan Steel Will Cut Prices, Again, As Demand Slumps

When Baoshan Iron and Steel, the country’s biggest steelmaker, says it is to cut prices by up to 20%, it is a clear sign that the economy is slowing and an industry is in trouble. And even the more so as it is Baoshan’s  third price cut in three months.

Nor is Baoshan alone in price cuts as steelmakers face rising raw material and energy costs, slowing demand and growing supply from new plant. Prices hit a peak in June having risen 23% from the start of the year, but prices have since tumbled back even more, some 30%-40% as carmakers and builders have slashed orders.

Crude steel output, at 39.6 million tonnes was down 9% in September from a year earlier and 7% from the previous month. Prices for some steel products have fallen below the cost of production for all but the most efficient mills.

Last month, four big Chinese steel makers, including Shougang Group, following the lead of Baoshan and ArcelorMittal, agreed to cut production by up to 20%, perhaps until the year-end, to boost prices. The industry is highly fragmented and authorities have been on a push to close down antiquated, polluting and small mills. The slump in prices and demand will only force that process. China’s steelmakers are heading down the familiar path of consolidation.

Lakshmi Mittal Looking To Expand Further In China

ArcelorMittal makes one in every seven tonnes of steel produced outside China, but only one twentieth as much of that made inside the country. So the world’s biggest steelmaker is looking to expand its presence there.

It has already taken a 32% stake in Hunan Valin Tube Steel & Wire and is awaiting Beijing’s approval to take a 73% stake in China Oriental. But Lakshmi Mittal’s latest proposal is on a grander scale: a 25% stake in Angang Steel, China’s second largest steelmaker, according to the FT.

Angang’s chairman Zhang Xiaogang brushed the proposal back when the two men met a couple of months ago — sort of. He says he would welcome Mittal taking a 1%-2% stake and the setting up of a production joint venture. Angang Steel’s quoted entity is 63% state owned and no foreigner is likely to be allowed too influential a stake.