Posted on 17 Aug 2015
China is flooding the world with cheap steel and Europe, the US and India are now starting to respond with tough anti-dumping measures.
The implications of this for Australia are not great.
Europe has imposed provisional duties on Chinese steel imports of up to 25.2 per cent, India has slapped on an anti-dumping duty of $US316 a tonne and, in the US, three anti-dumping filings have been made, claiming duties of up to 266 per cent.
Eurofer, the European steel industry association, claims that China’s excess is now 340 million tonnes out of a total installed capacity of 1.1 billion. “This overcapacity alone is more than double the EU’s steel demand,” it said.
ANZ Bank’s commodity strategist Mark Pervan attributes the problem to a slowdown in domestic demand for steel, caused by the decline in housing construction.
He says that’s resulted in a 26 per cent increase in Chinese exports so far this year, despite the dropping of 10 per cent export rebate at the start of the year.
“Since 2009, Chinese steel production growth has been outpacing domestic steel demand. The excess supply, keeping production growth positive up until this year, has been exported”, Pervan says.
China’s horrendous steel overcapacity has dragged down the prices of both steel and iron ore, and is the key factor in the collapse of Australia’s terms of trade.
Chinese steel producers are now facing a terrible problem.
According to Mark Pervan, they are losing an average of $4US0-50 per tonne selling steel into the domestic market because of a 17 per cent decline in real estate activity that has cut demand by 50 million tonnes.
But their Plan B of exporting the steel is now starting to be cut off by anti-dumping measures.
“The concern now for Chinese steel exporters is that if anti-dumping duties are introduced (which looks increasingly likely) the positive price arbitrage window will shut.
“This will put a big question mark over the sustainability of China’s current high level of steel exports, and ultimately, overall production.”
That, in turn, will put a big question mark over Australia’s iron ore industry — both the price and the volume.
In this context, the 22 per cent bounce in the iron ore price over the past month to $US54 per tonne looks fragile indeed.
The Chinese central bank, meanwhile, is trying to take some of the pressure off the steel exporters by moving the currency lower.
But by doing so, it is flirting with capital exodus out of China and a severe tightening of monetary policy as its foreign exchange reserves are run down, not to mention financial market turmoil, so the answer is not much: 4 per cent off the value of the yuan last week.
The anti-dumping actions initiated by Europe, India and the US will force the Chinese steel exporters to confront either a further decline in prices or volumes, with major production shutdowns.
The short-term implications for Australia’s iron ore industry are just as negative, although in the longer term an adjustment to China’s production will put both the steel industry and the raw materials industries on a stronger footing.
