Posted on 26 Oct 2015
As the world’s second-largest economy loses steam, industries around the world are feeling out of puff.
The latest victim is the steel business, as China desperately tries to compensate for slack domestic demand by exporting its excess production at fire-sale prices. Steel mills around the world are feeling the pinch.
Posters with the slogan “Save our Steel” are plastered on the walls of pubs and shops around the seaside town of Redcar in northeast England.
Wounded by an influx of cheap Chinese steel, Thailand’s largest steelmaker, Sahaviriya Steel Industries (SSI), will mothball a slab plant in Redcar that it acquired just four years ago. Local subsidiary SSI UK will go into liquidation and nearly 2,000 workers will lose their jobs.
The news rocked Redcar, where steelmaking has long been the main industry, although it has shrunk drastically over the past decade or so as British steel became less competitive. “We used to say steel work is a lifetime job, but now it’s all different,” said a 55-year-old man puffing on a cigarette outside a pub near High Street. His 29-year-old son was among those laid off by SSI. The son has a nine-month-old baby. “Now I’m going to have to pay for all of our Christmas expenses,” grouched the father.
Meanwhile, roughly 350km to the south, the queen’s staff was busy preparing rooms at Buckingham Palace for a guest from the East, specifically, Chinese President Xi Jinping. The British government was laying out the reddest of red carpets, including a ride in a royal horse-drawn carriage, an invitation to speak to both Houses of Parliament and a trip to Manchester escorted by Prime Minister David Cameron.
Cameron was scorned internationally for kowtowing to the communist state, but the prime minister was convinced that strengthening ties with the Asian giant would bring enormous commercial opportunities. Yet, with China’s economy ailing — economic growth for the three months ending in September marked a six-year low — Cameron may be looking at China through rose-colored glasses.
Steel sagging
A ton of Chinese steel — heavily subsidized by the government — is cheaper than a ton of cabbage, to say nothing of U.K. production costs. Both the yuan and the Russian ruble have depreciated, adding further pressure to the industry.
The British government decided not to bail out SSI UK, given that the company has never been able to make a profit since it bought the Redcar plant from India’s Tata Steel for $469 million in 2011. Parent SSI has had four straight years in the red through 2014, although its core flat steel operations have been profitable.
“Slab prices declined significantly and were below our production cost,” SSI President and CEO Win Viriyaprapaikit told reporters in Bangkok in late September. On Oct. 2, the parent company submitted a request to Thailand’s central bankruptcy court to enter rehabilitation. Its debts to three major Thai banks total around 50 billion baht ($1.41 billion).
Steelmaking in the U.K. is in crisis. Following the plant closure in Redcar, Tata Steel announced 1,200 job cuts at its plants in the country on Oct. 20. Prices have halved over the past year.
On Oct. 16, three days before Xi’s arrival, Business Secretary Sajid Javid convened a summit with key players in the U.K. steel industry in Rotherham, South Yorkshire, home to a big Tata Steel plant. “This is a hugely difficult time for the steel industry across the world, one of the toughest times ever,” Javid said.
Indigestion
The flood of cheap Chinese steel can be traced to a saturated home market. In the first six months of the year China’s gross domestic product expanded 7%, but power consumption and freight volume — which Chinese Premier Li Keqiang himself has said are more accurate barometers of the economy — grew only 1.3% and 4.2% respectively.
China’s GDP target is set at the annual meeting of the National People’s Congress in the spring. Provincial heads of the Communist Party dare not report economic results that fall short of the target, so they tend to pressure state-owned enterprises to maintain a high level of production, even when there is no demand. This leads to excess inventory, leaving SOEs little choice but to dump products overseas — sometimes for less than the price of cabbage.
China’s crude steel output in the first eight months of 2015 dropped 2%, year-on-year, while exports jumped 26.5%.
South Korea’s biggest steelmaker, Posco, reported on Oct. 20 its largest-ever quarterly loss for the July-September period. With world prices depressed by the abundance of Chinese steel, the company said its net loss reached $582 million.
Taiwanese steel mills have also been hurt by a grueling price war with Chinese competitors. China Steel Corp., the largest steelmaker in Taiwan, posted a dismal 20% decline in revenue in January-September. Taiwanese media speculate CSC will be forced to cut output from its blast furnace in the October-December quarter. If it does, it will be the first such cutback in 15 years. CSC has denied the reports, but rumors persist.
Taiwan’s largest petrochemical company, Formosa Plastics, is set to open a large steel mill in Vietnam in the first half of 2016, further adding supply to an already glutted Asian steel market.
India’s Tata has announced a voluntary retirement program. Although layoffs are strictly regulated in India, the company is working on incentives to encourage retirements, as it tries to bring down personnel costs.
Battening down
Governments around the world are moving to protect their domestic steel industries, which many see as vital. Since the summer, Pakistan, Turkey, Thailand and Malaysia have launched anti-dumping and anti-subsidy investigations over Chinese steel.
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In late September, the Mexican Ministry of Economy announced a 15% temporary tariff to shield domestic steel companies from the flood of cheap imports. The tariff will run for six months starting in October. Economy Minister Ildefonso Guajardo called the move “an emergency measure.” Because countries that have free trade agreements with Mexico are exempt, the tariff appears to be targeted at Chinese and Russian steel.
Burning off China’s excess capacity could be a long, drawn-out process as it was in Japan in the 1990s, warned Johanna Chua, Citigroup’s chief economist for the Asia-Pacific, because the government may keep many “zombie” companies alive to avoid triggering a wave of bankruptcies.
China has strongly opposed the anti-dumping measures. “Imposing restrictions on Chinese steel products cannot fundamentally solve overcapacity, which is a common problem confronted by the global steel industry as it undergoes restructuring,” said Ministry of Commerce spokesman Shen Danyang.
Yet China itself has vociferously protested European and Japanese exports to China of high-performance, seamless stainless steel tubes used in coal-fired power plants. China has alleged Japanese and EU steelmakers are selling their products at unfairly low prices in China. In 2012 it imposed an anti-dumping duty to restrict imports.
