American steel manufacturers are held to a set of standards created by organizations like The American Society for Testing and Materials (ASTM) that determine the appropriate chemistry mixes for different types of steel. These standards are intended as a safety precaution to ensure the right quality of metal is being used for the right product.
Companies in China are producing steel at a faster rate, flooding the market and dropping prices. It is produced at a rapid rate and it is not held up to the same quality standards as American steel. There are anti-dumping laws in place by the World Trade Organization to prevent foreign companies from exporting, or “dumping,” goods to the United States at either prices too far below the domestic price or when they flood the market with an excess quantity that is beyond the normal competition. This situation has lead to trade wars headlined by tariffs between the United States and China.
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China's excess capacity is seen as one of the most significant challenges facing the global steel industry today. China accounts for approximately 50% of global steel production. Over the last decade global steel production has doubled from around 800 million tonnes to around 1.6 billion tonnes a year, mainly driven by rising output in China.Around 2005, China designated steel as a pillar industry for the Chinese economy. This was primarily driven by the government's plans for modernization of the country's infrastructure, construction and manufacturing industries. By 2006 China became the world's largest steel exporter by volume, up from the fifth largest in 2005. Today it remains the world's largest producer of steel.China has made astonishing gains in steel production and today manages to sell steel at a price cheaper than the rest of the world. Economists argue that government subsidies are responsible for China's steel overcapacity. While clear data on this is not readily available, given the closed nature of the Chinese economy, a study commissioned by the Alliance for American Manufacturing, has found that total energy subsidies to Chinese steel just in the first half of 2007 reached $27 billion. About 95% of that amount was for coal. There is thus a clear correlation between the increase in Chinese energy subsidies and the growth of steel production and steel exports.Chinese overproduction turned problematic to other markets in 2014, when Chinese demand plummeted with its construction boom coming to an end. China's domestic demand sagged by 3.4% in 2014 prompting the country's state-owned steelmakers to sell their growing surpluses in foreign markets at throwaway prices. This fall in demand also led to a sharp fall in global prices. Global steel prices have declined sharply from around US$460/tonne to around US$260/tonne in line with the glut in supply and the sharp decline in raw material prices.Recognizing the need to protect domestic steel manufacturing capability against the Chinese onslaught, globally over 400 trade actions have been taken with the majority focused on China. Countries have taken the safeguard, anti-dumping or countervailing duties (CVD) route to counter the sub-standard steel entry. The U.S. Department of Commerce has slapped CVD as high as 236% on steel from China in November, 2015. Further in December, 2015, US imposed 256% import tariff on corrosion-resistant steel imports from China which were sold at unfairly low prices. Brazil has also imposed import tariffs of 8-14% on steel products from China. In Europe, Italy has spent €2 billion to support the Ilva steel mill in Taranto which was under severe losses.Absence of government intervention in UK has, at least partly, triggered announcement of Tata Steel's decision to restructure its UK business. Tata Steel's announcement follows Thailand based Sahaviriya Steel Industries' decision to mothball their steel making plan in North East England and Caparo Industries' decision to put certain UK businesses under administration.Recently, an international seminar to discuss the excess capacity and structural adjustment in the steel sector was held in Brussels. It was jointly held by Belgium and the Organization for Economic Cooperation and Development (OECD).The seminar which was attended by representatives from around 30 Western and Asian nations, including the United States and China, and the World Trade Organization, World Steel Association and OECD. The main objective of the meeting was to exchange views on the actions that would help reduce steel excess capacity, and to strengthen efforts to increase transparency through information sharing about measures taken to address excess capacity and promote structural adjustment in the steel industry. In many ways this was arguably an effort to increase pressure on China to rein in steel production.Perhaps buckling to international pressure to curb steel output and relieve a global glut, China did cut down on steel production. However, a recent rise in global steel prices has led to a rapid reopening of capacity that had been shut or suspended. Data from the China Iron & Steel Association (CISA) says that March, 2016 steel production hit 70.65 million tonnes, amounting to 834 million tonnes on an annualized basis.Recent years have been challenging for the Indian steel industry given the 4 to 5 year ban imposed by the Supreme Court on iron ore mining in Karnataka, Goa and Odisha during the global boom in steel demand and prices. Tragically the ban was lifted around the time that the Chinese demand had plummeted and the prices were tanking. According to industry consultancy Steel Mint India, iron ore imports jumped manifold to a record 15 million tonnes (MT) in the financial year 2014-15 owing to ban on mining activities and declining global prices. In 2013-14, the imports stood at a mere 3.2 lakh tonne. For India's steel companies, this turned into a raw material crisis that eventually impacted balance sheets and affected their capability to stay competitive.China is dominating the world steel industry. Given steel's strategic importance to a country's growth and development, this cannot be ignored. In the backdrop of Tata Steel's announcement regarding its UK business, carmakers in the UK have warned that volume car-making will disappear from the country if the steelmaking crisis is not resolved. For any country, a strong and sustainable domestic steel manufacturing capability has been historically a prerequisite. The same holds true for India also. The steel sector has been a major contributor to India's manufacturing output. Steel is the backbone of the Government's public infrastructure and urban development goals. To name a few - Make in India (both industrial infrastructure and end product), Smart Cities and AMRUT ride on availability of steel. It is action time for our mandarins to salvage the backbone of all construction work and one of our core industries - steelThe author is Partner, J Sagar Associates