China’s Peak Steel Demand Threatens to Spark Trade Hostilities

8 July 2015

China’s demand for steel has peaked, if the Japanese experience of the 1970s is anything to go by. That could spur more trade conflicts as the nation ships its excess production overseas.

The current decline in Chinese steel output signals the growth period for the commodity has ended in a country where the pace of economic expansion is slowing. Risaburo Nezu, a senior research adviser at RIETI, a think-tank linked to Japan’s trade ministry, expects a prolonged slump, with an absence of growth in demand likely for the next 10 or 20 years.

“Once a country attains a certain stage of economic development, demand for steel stops growing,” Nezu said last week in an interview in Tokyo. “China is left with excess capacity that’s said to be 300 million tons to 400 million tons, equivalent to three to four times Japanese output. It won’t be easy to deal with this.”

Nezu’s view mirrors concerns running deep through an industry battered by a flood of cheaper metal from China, maker of half the world’s steel. Waning demand in China and new supplies from emerging markets from India to Brazil are set to cool the market and potentially stoke tensions among suppliers.

The situation in China “could trigger more cases of trade measures among steel suppliers” to protect earnings, said Yoku Ihara, president of Growth & Value Stock Research. “The industry is facing more negative factors than positive.”
Trade Conflicts

The steel sector accounted for 5 percent to 25 percent of all trade-related complaints to the World Trade Organization between April 2010 and 2015, according to a briefing paper from the Organization for Economic Co-operation and Development. Moreover, trade remedy measures such as countervailing duties and anti-dumping are resorted to more frequently by steelmakers relative to other sectors, the OECD concluded.

Steel demand in China will shrink this year and next in the first annual contractions since 1995, the World Steel Association said in April. Crude steel output will shrink as much as 2 percent this year, the first contraction since at least 1990, according to the China Iron & Steel Association.

The “supply-demand situation is deteriorating day by day,” Nobuyuki Kurosu, a marketing executive at Kobe Steel Ltd., said Friday at a briefing in Tokyo, referring to overseas markets.

Globally, supply of steel will exceed demand by 657 million tons in 2016, more than an estimated gap of 645.8 million tons in 2015, according to an estimate compiled by the OECD. That’s more the three times the size 10 years ago.
Lessons from Japan

Amid the glut, China is facing calls from other regions to take steps to cut steelmaking capacity to restore the health of the global market.

“A new normal has taken hold, characterized by slowed growth, with all regions suffering from a dramatic increase in unfair steel imports that is fueled by massive global capacity,” steel trade associations representing countries in North and Latin Americas and Europe said last month in a joint statement. “Looming over it all is China, whose massive and increasing overcapacity in an era of slowing growth has already destabilized the global steel market and trade flows.

Nezu, who also serves as chairman of the OECD Steel Committee and was a director of the trade ministry’s steel division in the early 1990s, sees similarities between what China’s steel industry is facing now and what Japan went through about forty years ago.

Japan’s crude steel output reached 119 million tons in 1973 and slipped to as low as 93.5 million tons in 1998. Japan, the biggest producer after China, failed to recover to the levels of the 1970s until 2007, aided by exports to meet overseas demand. Last year, Japan made 110.7 million tons.

‘‘The trade ministry never thought domestic demand for steel would keep falling,” Nezu said of the 1970s.

Japan’s economy expanded at an average rate of 4.2 percent from 1973 to 1991.

“Japan finally began to hold a view that domestic demand wouldn’t likely grow permanently more than 10 years after” the early 1970s and “it was the second half of 1980s that Japan worked on full-fledged capacity cuts,” Nezu said.