Taking a closer look at the Chinese steel industry

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Published: August 23, 2016 6:07:10 AM

What China thinks today, the world thinks tomorrow. Is it the best way to describe the current state of affairs in the global steel industry?

What China thinks today, the world thinks tomorrow. Is it the best way to describe the current state of affairs in the global steel industry? Perhaps it is generally true. While the Chinese level of imports of coal and iron ore defines the prices ruling for their merchant trade, Chinese growing exports (67.41 MT in January-July 2016, an 8.5% rise over last year) is giving some well-earned relief to its domestic producers fighting capacity elimination compulsions from their own government. It is also a fact that Chinese exports to the US, EU, Canada, Brazil, Turkey, Vietnam and India are restrained by the imposition of anti-dumping, countervailing and safeguard duties.

Chinese imports to India in the first four months of the current fiscal have reached 706 MT, nearly at the same level as last year. In 2015, China directly exported around 112 MT of steel and indirectly exported additional 73 MT of steel in the form of engineering items containing steel.

In the current year, China has produced 467MT of crude steel in the first seven months, lower by only 0.5% compared to last year. It has imported 582 MT of iron ore with 8.1% growth over last year. However, the price rise in the post-December phase enabled Chinese producers to taste profitability with average profitability (EBT/sales revenue) of 0.97%.

Higher investment in real estate in urban areas leading to more floor space under construction, more fixed asset investment in railways, highways and especially in civil aviation, rising automobile production, more value-added of the mechanical engineering and metal products sector— all contributed to generate and sustain steel demand in China in the current period.

It is reported that China has closed around 21.26 MT of crude steel capacity in the first seven months of the current year against a target of 45MT and is monitoring closely the planned capacity elimination programmes.

Over the last one decade, China has continued to add fresh steel capacity to reach more than 1.1 billion tonne to cater to the massive indigenous demand and export demand from all the major consuming countries.

The slowdown in Chinese economy (currently growing at 6.7% as compared to 10% reached a few years ago) with more emphasis on consumption rather than investment leading to growth in light industries as opposed to heavy industries, along with growing concern over carbon emission, has made cap on fresh capacity and elimination of inefficient capacities essential components of its industrial policy guidelines.

Interestingly, a recent report on the massive subsidies granted by the Chinese government to aid, help and nurture its steel industry in all these years speaks volume of the steadfast grit and determination of the government, the party and all the stakeholders to see that the increasing flow of fresh availability from the domestic producers finds a market and with a pre-fixed compensation to cover their production cost and with a mark-up.

The state supports are in various forms like cash grants, equity infusions, preferential loans and credit, land use subsidies, raw material price controls, benefits of tax policies, pre-planned mergers and acquisitions.

China kept its currency artificially low to give Chinese exports an advantage over the competitors. By 2014, the debt of Chinese steel industry stood at RMB three trillion with debt ratio exceeding the benchmark level of 80%. The financing came at extremely low, non-market interest rates on non-commercial terms by the Big-Four state-owned banks.

Another interesting feature was the nomination of government officials as permanent members in the board and at other critical departments in SOEs. This not only helped them to align policies with the government guidelines, but the companies also benefited by the association of the government officials in bagging orders in the big projects inside the country.

It is a fact that imposition of WTO-compliant trade measures against cheap Chinese exports by the US, EU and other host of countries in the recent period has minimised the application of direct cash benefits and other actionable subsidies, but the hidden subsidies still encompass a whole gamut of steel plant operations that would make it pretty difficult for China to get the market status after December 2016 in case of all types of trade investigations.

The author is DG, Institute of Steel Growth and Development. Views expressed are personal.

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