Steel surplus calls for global attention

A S Firoz

The International Iron and Steel Institute (IISI) has called for dialogue on Multilateral Agreement in Steel Industry. This follows in fact several efforts earlier. The matter was discussed in a recent meet of OECD. More importantly, the proposal finds place in US President George Bush’s announcement to initiate a Section 201 safeguard case against foreign steel.

A global steel dialogue, being discussed this time around, will perhaps go longer, as this has the backing and perhaps proactive efforts of President Bush. The global talks are being proposed this time for a slightly different reason. When the talks on Multilateral Steel Agreement (MSA) and Multilateral Specialty Steel Agreement (MSSA) were held several years ago, the main issues were the need for faster globalisation and removal of protection to domestic industries by nations, by removing quantity and tariff barriers at the border.
Although these issues still have relevance, to a lesser degree, as tariff and non-tariff barriers have been lowered by most countries to a large extent, the current efforts have been spurred by more serious exigencies.

The world has huge over capacity in steel. The estimates of that vary from expert to expert. A figure around 100 million tonnes should be more realistic. This is the effective excess capacity and does not take into account those lying in obsolete plants which cannot be brought into operation in the kind of competition in the market today.

The important point here is not the size of this excess capacity, but the use of this capacity. Last year, the global crude steel production stood at about 845 million tonnes. This was not at the full capacity of the industry. This year, the figure is expected to drop by about 10-15 million tonnes. Even at this level, it will exceed the global consumption. What is a matter of larger concern is that the production continues at this rate despite the steel prices being at historic lows.

The steel companies are struggling to survive. Many have fallen by the wayside. Yet, the world has not seen cessation of new investment in the industry to create new capacity. With abundant capital floating across the world, there are still overzealous and carefree entrepreneurs who see a future in steel. While efforts can be made to halt new capacity growth, the current focus on the current ones, that are considered inefficient and are being maintained through state assistance.

According to the IISI, the companies owning such plants sell their products below costs to survive in global competition. Such pricing practices distort the global market dynamics and adversely affect trade flows. The IISI says, “The lack of transparency in the market place in turn complicates the situation, as various exporting countries have little understanding of actual trade flows until a problem has been created in export markets.”.This may be a matter of information flow. The steel market has become so fluid that its current assessment has also become increasingly difficult. But, the IISI has other points to make on it.

They said, “Faced with an oversupply in their home markets arising from both domestic competitors and steel importers, steel companies have had recourse to their national trade laws to try to shield themselves from market disruption.” According to them, “As each country has applied its anti-dumping and countervailing duty legislation, the surplus steel has moved on to another region giving rise to more trade problems.”

While in most of the areas, the IISI formulations are no different from those talked about in the past, the question of permanent closure of capacity is being discussed more vigorously this time. It is because President Bush has recently called for negotiations with governments of steel producing countries to eliminate excess capacity. The President has also called for new rules of trade in the future. The question is how to eliminate the much talked about excess capacity ? How will you define this ? Is it the capacity in a country over and above the domestic demand ? If it is at a global level, how is it going to be determined ? As said in the beginning itself, there is no accurate estimate of that yet. Even if this is estimated by an expert, which of the world capacity will be eliminated ? Will it be equally distributed over nations or that some nations will be identified and asked to do so ? There will be many questions like these. Obviously, it is too simplistic and impractical.

If one goes by the criterion of efficiency, again, which of these capacities will be called inefficient ? Will you ask a steel rolling mill or an electric furnace in remote Africa to shutdown because that cannot match the operational or cost efficiency of a plant in Japan or Europe? This will also not work.

Then, as prescribed by the IISI, will the free market take the inefficient to the graveyard and solve the problem? If this were possible, the steel industry would not have seen a problem of this magnitude today. Steel is sensitive to all countries - USA, Japan or India. Also, each country’s trade policy is governed by compulsions and needs of that country, the WTO notwithstanding.

(Author is Chief Economist at the Economic Research Unit, JPC and views expressed here are personal)