Global Spat Over Steel Trade Could Shift Supply Patterns

12 October 2016

A global fight over the steel trade could affect sourcing for one of the most important commodities for multipurpose vessels.

The United States and European Union are pushing back against alleged below-cost dumping of steel by China, which has increased its share of the world’s crude steel production to 49.5 percent last year from 12.7 percent in 1995 while expanding output at a compound annual rate of 11.5 percent since 1990.

The United States has moved to impose anti-dumping penalties and countervailing duties that would be as high as 532 percent for some Chinese products, such as cold-rolled steel used in production of autos, appliances, and other products.

The United States and European Union also have imposed lesser penalties on steel from countries including Russia, Turkey, South Korea, Japan, and India. The penalties vary by country and commodity.

As those retaliatory measures start to bite, steel buyers will have to look elsewhere for supplies, said John Anton, director of steel analytics at IHS Markit, parent company of Steel is a fungible commodity, and buyers will find the most efficient source.

“It’s a game of whack-a-mole,” he said. “They hit China, and people buy from Korea. They hit Korea, and then people buy from Indonesia or Taiwan. People find a way around these obstacles, but it does require redrawing of a supply chain.”

The shifts will require a period of adjustment for buyers. “People who bought from Korea, for example, may never have bought from Indonesia and have no local contacts there,” Anton said.

US and EU steelmakers hoping the retaliatory measures will cure their problems are likely to be disappointed, Anton said. “People always find a way around these things,” he said.

Overall volumes won’t change — they’re determined by market demand, which is expected to remain flat, Anton said.

Steel is the world’s most important industrial material, and has direct and indirect impact on breakbulk volumes. Besides filling ships with finished and semifinished steel, the industry influences shipments of ores, coal, and scrap. When dry bulk carriers don’t have bulk cargoes to carry, they compete for breakbulk shipments, adding to capacity and pressure on freight rates.

Global steel production ranged between 700 million and 900 million metric tons a year from the late 1980s through 2001. Since 2013, it has topped 1.6 billion tons — the level that Anton considers the break-even point for pricing equilibrium.

“Above that level, prices suffer. Below that level, prices rise,” Anton said. Last year’s production was 1.621 billion tons, according to the World Steel Association.

As the world’s largest steel producer and exporter, China is the main cause of overproduction. “Production in the rest of the world is not out of hand, but China produces half the steel in the world, Anton said.

As its domestic growth slowed, China increased its exports to a high of about 130 million tons in 2014.

Much of that export volume has gone to the United States, where demand has been relatively healthy and imports captured a record 29.6 percent share of the market in 2015. US steel consumption has exceeded domestic production by an average of 22.9 percent since 1999.

Steel has long been a source of allegations of below-cost dumping. Since 1990, steel has accounted for 217 of the 580 preliminary US hearings on anti-dumping penalties, according to Brown Brothers Harriman Partners.

“China for quite a few years made sure never to export more than about 50 million metric tons, because they did not want to make the United States and Europe angry,” Anton said. “In 2014 and 2015, they exported more than double that amount. And guess what, they made the United States and Europe angry.”

China has announced plans to curtail production by closing inefficient mills. Two of China’s five largest steelmakers, Baosteel and Wisco, have announced plans to combine to form the world’s second-largest steel company after ArcelorMittal.

There have been reports that the merged company may close plants and reduce output at mills in inland provinces in order to concentrate production closer to seaports, and around Shanghai, to help reduce that city’s air pollution.

Baosteel previously announced plans to cut 9.2 million tons of production capacity by 2020. Wisco said it would shutter 4.4 million tons of steelmaking production and 3.2 million tons of iron production this year.

Anton questioned whether Chinese production cuts will be permanent. When China has cut production in the past, he noted, shuttered mills have been returned to operation whenever prices improve. “Unless they dynamite or bulldoze those mills, that’s what will happen again,” Anton said.

Overproduction is a chronic problem in the steel industry, which Anton compared to a 10-person lifeboat with 11 people crammed into it. The boat will capsize unless someone jumps out, but no one wants to go first.

“Everyone’s hanging in there, hoping prices will recover," he said. “And at the first hint of higher prices, whoever jumped out of the boat will climb back aboard. Everybody knows what the problem is, but it’s irrational for any one person to solve the problem by volunteering to jump overboard and die.”


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