The Chinese steel industry’s attempt to export its way out of the problem of domestic oversupply in 2015 has failed. The solution to the industry’s problems was, and still is, to make substantial cuts in local steelmaking capacity to bring output and demand into balance.

Despite annual exports of finished steel products from China rising from 62 million tonnes in 2013 to an estimated 115 million tonnes in 2015, the local mills have suffered domestic selling price reductions of close to 50 percent over the time span.

Granted, the cost of raw materials has declined during the period. However, the main driver for the price reductions in China and globally has been the substantial oversupply situation which was created, in part, by the rise in the level of low-cost exports from Chinese and Russian steel producers.

The vast majority, if not all, of the manufacturers of carbon steel grades in China are in a lossmaking situation because the decrease in raw material costs is much smaller than the reduction in steel selling values. With a large majority of the Chinese steel enterprises being state-owned, such a situation can only be sustained through local and national government subsidies.

Any plan that the Chinese may have had to improve the performance of the local steel industry has, to date, met with only limited success. Typically, over the last twenty-four months, domestic prices for hot rolled coil in most other parts of the world have fallen by around 40 percent but halved in China.

However, in the current situation, one in which virtually the whole of the global steel industry is now making losses, we have noted little substantive reaction by the governments of the countries most affected by the import growth. The imposition of import duties has been limited so far – mainly due to bureaucratic difficulties associated with the current trade regulations.

Low-priced exports of steel from China and Russia have proved to be successful in restricting competition in the global market. The recent closure of several, privately owned plants in the western world highlights this point. Several other factories are being shuttered. Many more are cutting output and their workforces.

Are countries with state-owned steel industries to be allowed to dominate the sector through subsidised manufacturing? Are western governments sleepwalking into a world in which the majority of carbon steel products will be only available from countries which are prepared to subsidise their state-owned steel mills?

A vibrant steel industry is a prerequisite of most economies. Development of new and sophisticated steel grades is essential for the improvement of a wide range of industrial products required for modern living. If the steel sector in the western world is decimated through poor profitability, choices for the engineering companies will be limited and only available in remote locations.

Surely, this whole scenario is a betrayal of the millions of steel workers who have lost their jobs over the last thirty years in the name of free market conditions and the elimination of government subsidies.

Source: MEPS China Steel Review – December 2015 Edition

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