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China’s steel leviathan

China’s steel leviathan

The steel plant at Port Talbot is just the latest casualty of the wave of Chinese steel imports flooding into Europe

How big is China’s steel industry?

Huge. For the past three years, it has produced some 800 million tonnes annually – about half the world’s output. No other nation comes close to matching it: Japan, the world’s second-biggest manufacturer, produced 110 million tonnes in 2014; the US, in third place, 88.2 million. The UK in that year produced just 12.1 million, far less than the 50 million produced by China’s biggest steel company, the Hebei Iron and Steel Group (the world’s third-biggest producer). Six of the ten biggest steel companies in the world are Chinese; and though the biggest steel company of all is not (see box), it can’t keep up with the Chinese competition.

How did China’s industry get so big?

Like every part of China’s economy, it benefited hugely from the shift from a planned economy to one with elements of private ownership and free enterprise – a process initiated by Deng Xiaoping in 1978. Back then, China was responsible for about 5% of the world’s steel output, but production steadily rose through the 1980s and 1990s, and by 1996 China had overtaken Japan as the world’s biggest producer. However, it was joining the World Trade Organisation (WTO) in 2001 that was the real game-changer. In the ensuing decade, China’s steel production almost quadrupled, peaking at 822.7 million tonnes in 2014. Now, however, the industry is in trouble.

What has gone wrong?

Its growth had been driven by a huge rise in domestic demand: steel was needed for the skyscrapers of its new mega-cities, for the apartments housing the millions migrating from the countryside, for railways, dams, bridges and for heavy industry. But the glory years of China’s economic miracle are over. Annual growth has slumped to about half what it was in the 2000s. The economy last year grew by 6.9% – its lowest rate for 25 years. The property sector has been hammered: after years of frenzied construction, apartment blocks stand empty; new projects have been stalled.

And the upshot of all this?

China is suddenly producing far more steel than it needs. Its big steel companies reported a combined loss of more than $11bn in 2015, compared with profits of almost $5bn the previous year. Almost all producers are scaling back: China’s fifth-biggest, Wuhan Iron and Steel, announced last month it may cut up to 50,000 jobs out of a total workforce of 80,000. Last year saw China’s first drop in steel output since 1981. And some experts predict a contraction of 15% this year.

Are some companies closing?

Yes: plants that produced 80 million tonnes a year between them have already shut. But the rate of closure is far higher among China’s smaller, mainly privately owned firms. The big companies – mostly owned, or part-owned, by provincial governments – are all supported by Beijing in some way, whether through subsidies, the provision of cheap energy (notably, subsidised coal) or soft loans. And Beijing won’t let them go bust.

Then what action is it taking?

Beijing has announced plans to rebalance the economy, moving away from heavy industry towards services and consumption. And in phase one of its long-term plan to deal with the coal and steel industry, it talks of laying off 1.8 million workers across both sectors, or about 15% of the total workforce. But spooked by the growing industrial unrest across the country (there were twice as many strikes and worker protests last year as the year before), the government will, in practice, tread carefully.

What is likely to happen in reality?

Analysts agree that for the foreseeable future, China will go on producing more steel than it needs – and will compensate by selling far more of it abroad. Last year exports grew by more than 20%, to 112 million tonnes. That is proving disastrous for the European steel industry, which has lost a quarter of its workforce in the past six years. In Britain, where cheap Chinese imports doubled in 2014, the industry has shed 5,000 jobs since last summer, and thousands more will go if the Indian firm Tata, which is closing all its UK operations, fails to find a buyer for Port Talbot and its other unsold steel plants here.

Why is Chinese steel so much more competitively priced?

Mainly because labour costs in the UK are about 20 times those in China. But it’s also the case that the price of Chinese steel is often set artificially low. The textbook definition of “dumping” is selling a product abroad for 10% less than its domestic price, and figures from the research company Metal Bulletin indicate that China does this regularly. In 2015, 37 cases were filed against China’s steel producers, mostly on anti-dumping grounds. However, because the EU has signed up to the WTO’s “lesser duty” rule – which means that any duty you impose has to be lower than the margin of dumping – EU tariffs on steel are only about 9%. By contrast, in the US, which has lifted the rule, the Department of Commerce has ruled that China has been selling rolled steel at unfairly low prices, and has imposed tariffs of up to 266% on Chinese imports.

Is it Brussels that should be held responsible for this?

On the contrary, it is Britain which has blocked the EU’s attempts to revoke the “lesser duty” rule and introduce tougher tariff restrictions. Britain is also the leading voice in arguing that China should be granted the WTO’s much coveted “market economy status”, meaning that other countries would no longer be able to treat it as a “non-market economy” and impose higher tariffs as a result. Business Secretary Sajid Javid says this is consistent with the UK’s commitment to the principles of free trade, but critics claim it is all part of George Osborne’s mercantilist attempt to curry favour with Beijing – to coax more inward investment from China and to open up Chinese markets (in pensions, for instance) to British companies. Undaunted, Beijing has this month imposed a 46% import duty on a type of high-tech steel made by Tata in Wales.

India bows down to Beijing

The effects of China’s overproduction on the global market are reflected in the fortunes of the world’s biggest steel company, ArcelorMittal, created by the takeover in 2006 of the European company Arcelor by Indian-owned giant Mittal Steel. In 2014 it produced some 98 million tonnes of steel – more than double the output of the Hebei steel group. But having routinely posted annual profits of close to $10bn in the second half of the last decade, its fortunes have plummeted: last year its losses were a staggering $7.9bn. The resulting share price fall, from a high of €65 in 2008 to under €5 today, has wiped an estimated €30bn off the personal fortune of the Mittal family.

To cut its mounting debt pile, the Luxembourg-based company, which owns plants in Europe, Brazil, North America and South Africa, has announced a plan to restore profitability by raising production and focusing on higher-margin steel products. To the surprise of industry analysts, the plan features few plant closures. Yet with China’s overcapacity set to continue, ArcelorMittal may have no choice but to downsize.

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