China increased its steel production capacity by 540 percent between 2000 and 2014. Then the market slowed. To keep from having to lay off workers, China’s steel companies started “dumping” steel on world markets at below-market prices. As a result, steel companies outside of China, including in the U.S., have to lay off workers or close down. What’s the solution?
When China’s growth was very high, and China was building tall buildings and high-speed rail all over the place they needed a lot of steel. Then their economy slowed. Now China is making more steel than they need.
Meanwhile countries around the world are fighting their own slow growth with austerity policies that literally take money out of their economies – like cutting back on infrastructure maintenance and modernization. And their slowing economies mean less steel use.
Leo Gerard, International President, United Steelworkers, explains in “When Too Much Is Terrible“:
China makes too much steel. And many other commodities. By providing government subsidies and other supports like currency manipulation that are illegal under international trade regulations, China sells those products overseas at prices below production cost, undercutting fair market manufacturers like U.S. Steel and Republic Steel in Lorain [an Ohio town]. Too much has been good for China until now. Now it wants “market economy” status in the World Trade Organization. So, suddenly, it has announced it will reduce its excessive steel production. That will cost 400,000 Chinese steelworkers their jobs. It turns out that too much is terrible for Chinese workers and Chinese towns as well.
To put this in perspective, last year, as American and European mills closed, workers lost their jobs, and prices for some steel products fell by 50 percent because of massive oversupply from China, China continued steelmaking full tilt. It made half the steel in the world. And its exports rose by 50 percent.
So there is less demand for steel in China and around the world. Current global overcapacity is estimated at 700 million tons – more than seven times what U.S. steelmakers can produce. This is expected to get worse. Reuters explains in “Global steel demand set to fall again in 2016: Worldsteel“:
Falling demand has plunged the global steel market into crisis, with excess capacity taking a heavy toll on producers, including those in China – leading to plant closures and job losses.
Global apparent steel use – deliveries minus net exports of steel industry goods – is expected to fall 0.8 percent in 2016 to 1.488 billion tonnes after a 3 percent fall last year, according to Worldsteel.
China’s steel demand is seen falling 4 percent this year to 645.4 million tonnes and a further 3 percent in 2017, after a slide of 5.4 percent in 2015, the group added.
China, which produces about half the world’s steel, is under increasing international pressure to tackle a local supply glut that has flooded foreign markets with cheap material.
While demand is falling, China is producing so much more than it needs. This is “structural overcapacity.”
China, of course, wants to keep Chinese people employed. And China is a country that sees and does things as a country, not just a “market.” They have national industrial strategies that involve providing financing, low-cost energy, even free land to companies that operate according to the plan.
“Market” economy countries do not generally have national plans, so their companies compete individually against countries like China.
So China’s response has not been to cut back production and lay off workers. Instead, they are trying to keep their own workers employed by selling their steel around the world at below-market prices. China keeps promising to fix the overcapacity problem, but then does not follow through. Click for “A List of China’s Broken Steel Overcapacity Promises.”
As part of its national industrial strategy, China’s government provides its steel companies with cheap loans. Its state-owned bank keeps providing cash to steel companies even when they are losing money. These companies are then able to sell their product on world markets below its true cost. This glut of steel forces steel prices down worldwide, so companies in other countries are under pressure, laying people off, even going out of business.
China takes advantage of weak trade laws and weak enforcement. They know their excess capacity is wiping out producers across the world. But they also know that “market” countries do not tend to respond as countries, leaving their businesses to compete on their own. Market countries negotiate trade agreements that push companies instead of national strategies, and ignore the interests of stakeholders, like workers and consumers, and the environment. This allows China, operating as a country, to take advantage and cause worldwide imbalances that benefit China and hurt everyone else.
Worldwide Layoffs And Closures
The structural overcapacity and dumping are causing tremendous imbalances. Around the world, steel companies are laying off and closing plants.
In the U.S., the U.S. Steel Granite City Works in Granite City, Illinois, has laid off 1,500. The U.S. Steel Fairfield Tubular Operations in Alabama has laid off 1,000. Nearly 350 workers at U.S. Steel Keetac in Minnesota are out of work. Hundreds more workers at facilities around the country in places like Colorado and Oregon are laying off.
More than 13,500 U.S. steelworkers have been laid off or are facing layoffs – so far.
In the United Kingdom, India’s Tata Steel has put its UK operations up for sale. The Independent writes about this, in “The charts that show why China really is responsible for the plight of the UK steel industry“:
There is huge overcapacity in the domestic Chinese steel industry.
Less than 75 per cent of its domestic capacity is being used according to data from the analysis firm Cru: (chart) …
It’s important to recognise that this overcapacity has been created by an avalanche of cheap loans from state-owned banks to state-owned steel companies. The Chinese corporate sector is notoriously over-leveraged. And Chinese steel companies are among the most over-leveraged of all companies in China as this (showing interest payments as a percentage of operating profits) demonstrates:(chart)
The Voice of America explains that, “German Steelworkers Take to Streets Demanding Job Guarantees“:
German steelworkers took to the streets on Monday, demanding more measures against the dumping of cheap Chinese imports and greater job protection amid uncertainty over the future of Thyssenkrupp’s steel business.
Germany is Europe’s biggest steelmaker and 45,000 workers joined rallies across the country, the IG Metall union said.
“We need to think bigger and go beyond the ‘whack-a-mole’ approach of defending against unfair trade practices,” Paul said. “We need proactive approaches that don’t just provide relief after significant damage has occurred. And until we do, our steelmakers will continue to struggle.”
OECD Discussion Next Week
Politico’s Morning Trade wrote on Thursday that this will be discussed next week at a meeting of the Organization for Economic Cooperation and Development (OECD):
Meanwhile, trade officials clarified that their talks with Canada, Mexico, Japan and the United Kingdom on excess steel production and capacity are being done on a bilateral basis and are separate from a broader discussion on those issues next week in the Organization for Economic Cooperation and Development.
The OECD talks are not expected to produce a binding international agreement, but U.S. officials hope to reach consensus among China and other participants on ways to address excess capacity. An eventual action plan could include monitoring of capacity changes in the steel sector, such as new investments and closures.
“We’re looking at both what can we do here and what can we do with our immediate trading partners,” Deputy U.S. Trade Representative Robert Holleyman told POLITICO Pro. “We think the OECD has an important role to play in terms of trying to get more transparency around what’s happening … and indicating it’s not just a U.S. problem. It’s a global problem.”
They are talking about it, but not acting. They are “looking at both what can we do here and what can we do with our immediate trading partners” and “trying to get more transparency around what’s happening.”
Meanwhile outside of China workers are being laid off, factories are closing, regions are being further devastated as suppliers and stores around these factories cut back, all because the “market” countries have weakened their governments in favor of decision-making by individual corporations. This “market” world and its corporate-favoring trade agreements are not set up to respond when a country sees itself as a country and acts as a country with its own strategic national plan. (Related: California Taxpayers Financed A New Chinese Competitor.)
The Alliance for American Manufacturing is trying to drum up pressure on the administration to take action. Please visit and sign: “We Need Action! Save Our Steel Jobs — Before It’s Too Late.”
Roughly 13,500 Americans have been laid-off and major steel mills across the country have closed because of an unprecedented surge in subsidized steel imports from countries like China. It’s time for the U.S. Trade Representative (USTR) and Commerce Department to do something about this crisis.