In Commodity News 23/06/2017
Nothing is more satisfying than a story with clearly defined goodies and baddies.
Here’s one for the world’s steelmakers: Decades ago, China’s Communist overlords hatched a plan to destroy their trading partners. By building a bloated domestic steel industry, they could drive down global prices and suck profits from competitors. With its industrial base on life support, the West would become economically — and even militarily – defenseless.
That’s an only modestly exaggerated version of the yarn that’s supporting moves to restrict trade in steel. President Donald Trump will take “bold action” to address “serial dumpers” of metal “in the context of national security,” Commerce Secretary Wilbur Ross told Bloomberg Television this week.
Chart of global steel trade
Set aside the alarm this has caused in some of the U.S.’s trading partners. 1 Is China really to blame for the world’s steel woes?
The country’s industry is certainly hard to miss. Its 808 million metric tons of crude steel production last year accounted for almost half the global total. Exports have doubled since 2012 to 108 million tons, representing about 23 percent of international trade. Some 46 percent of the world’s 725 million tons of excess annual production capacity is located in China, according to a 2016 paper sponsored by the Alliance for American Manufacturing, or AAM, a lobby group.
Buried in those numbers is the germ of a more realistic story. Chinese steel exports have certainly jumped in the past four years, but the U.S. industry’s woes date back much further, to the aftermath of the 2008 financial crisis. And if China’s share of global overcapacity is outsized, it’s not because the country is uniquely predatory, but because its share of the industry as a whole is so big.
Here’s a better way of looking at it: With Chinese consumption leveling off and India just starting to boom, the world is going through a temporary plateau in steel demand. Global output of 1.63 billion tons in 2016 was below the totals for 2013 and 2014, and barely ahead of 2015’s 1.62 billion tons.
As a result, an industry that tends to plan for continual growth has more capacity than it needs. This isn’t a uniquely Chinese issue: Based on data from AAM’s study, Japan is about the only major steel market that has capacity utilization above 80 percent, generally considered a baseline for profitability.
Far from dragging its feet, China has been unusually active in addressing the issue. About 45 million tons of steel capacity was cut in 2016 and a further 32 million tons has been shuttered so far this year, according to the State Council. If the country hits its 2017 targets, it will have eliminated capacity equal to a year of U.S. production within 24 months. U.S. annual capacity, by contrast, remains at about 110 million tons, the same level as a decade ago when utilization was last in consistently positive territory.
As Gadfly pointed out last week, complaints that China’s steel mills are killing their American rivals are hard to square with the country’s blink-and-you’ll-miss-it share of U.S. imports. The more sophisticated version of the blame-China argument, espoused by Ross, doesn’t claim a direct link between the Asian and American gluts. Instead, low-cost Asian metal is assumed to be pushing down prices in the U.S.’s larger steel trading partners, who are in turn exporting their underpriced surpluses to America.
There’s an obvious problem with that position. As economist David Ricardo pointed out two centuries ago, while import competition can lower prices, it can’t cause demand to disappear. But demand for steel does appear to be disappearing in most rich countries, at least judging by the World Steel Association’s estimates of apparent usage:
What’s happened? Part of the explanation is simply that as people get richer, they consume less metal. But something else is going on that does relate to trade.
While America’s steel producers haven’t suffered overly from Chinese competition, their customers have been laid low. A swathe of steel-intensive manufactured goods that were made domestically a decade ago are now produced on the Pearl and Yangtze deltas instead. U.S. imports of machinery from China almost doubled to $107 billion over the decade to 2015, according to the International Trade Centre; those of commodity iron and steel rose just 54 percent, to $2 billion, before slipping to $685 million last year.
Restricting imports of commodity metal will be great news for America’s steel mills, whose share prices jumped on Ross’s comments this week. But they don’t need much assistance: At Nucor Corp., the biggest producer, Ebitda margins reached 16 percent in the first quarter, the highest since 2008. Across all steelmakers in North America, Europe and developed Asian countries, margins last fiscal year were 9.8 percent, just below the post-financial crisis record of 9.9 percent in 2010.
Nucor’s 1Q Ebitda margin
16%
The real victims of a trade war will be the millions of rust belt voters employed by companies that consume American steel, not the several hundred thousand involved in producing it. Ross should think hard before pulling the trigger.
Source: Bloomberg
