Chinese overcapacity is crushing the global steel industry
Summary
- Governments are stepping in to protect local producers
Each year China makes as much steel as the rest of the world combined. The vast scale of its output—around 1bn tonnes a year—is obscured by the fact that most of it stays in the country. Lately, however, China’s exports of the metal have surged, reaching 90m tonnes in 2023, up by 35% on the previous year (see chart 1). That may be a fraction of China’s total production, but it is more than what America or Japan make in a year. And it is enough to build a thousand Golden Gate bridges.
With China’s economy struggling, its steelmakers are selling abroad at bargain prices, to the distress of foreign competitors and politicians alike.
Last month Nippon Steel, Japan’s biggest steelmaker, called on the government to impose anti-dumping duties on Chinese imports. In the quarter to June its net profit shrank by 11% year on year. ArcelorMittal, Europe’s steelmaking champion, has been hit even harder: its net profit for the same period was down by 73%. “We want fair competition, and we know that the competition against China is not fair," says Genuino Christino, the company’s chief financial officer.
Such complaints tend to carry weight with politicians. Steelmaking is often seen as a symbol of a country’s industrial heft. And although a glut means lower prices for a diffuse group of consumers, politicians worry about the concentrated pain it inflicts on manufacturing workers and regions.
The rich world has experienced surges in Chinese steel exports before, including in 2008 and 2015. Each of these episodes led to trade barriers being raised; between 2008 and 2018 America, Britain, Canada and the European Union implemented more than 500 trade measures affecting imports of the metal from China. The consequences this time, however, are likely to be much wider-ranging.
That is partly because China’s economy is in a worse way. As its commodity-intensive property sector has suffered, its steelmakers have taken a beating. In August barely 1% of the 250 steel mills in China that report their finances to the government turned a profit, according to Isha Chaudhary of Wood Mackenzie, a consultancy. The domestic price for hot-rolled coil steel, a benchmark product, has fallen by 16% over the past year. Despite the slump in prices, many of the country’s producers have been reluctant to curtail production; idling a blast furnace can take months and is often costlier than keeping it running. Facing lacklustre demand from their usual customers at home, steelmakers are looking elsewhere.
The result is surging exports—and a fresh round of tariffs. Last month Canada joined the fray, imposing levies on Chinese steel. Even in America, where hefty tariffs already keep out most Chinese steel imports, producers still face cut-price competition as global prices fall. In July America announced a 25% duty on any steel coming from Mexico that had not been melted and poured in North America, in a bid to keep out any trace of Chinese steel that may travel via other countries.
The backlash is not confined to rich countries. These days most of China’s steel exports go to the developing world, which accounted for nine of the top ten foreign destinations for its steel in 2023 (see chart 2). Unlike in the rich world, demand for the metal is roaring in much of the global south. India’s steel consumption, for instance, is expected to grow by 8% this year and at a similar rate next year thanks to a boom in infrastructure investment, according to the World Steel Association, an industry group. The Belt and Road Initiative (BRI), China’s global infrastructure bonanza, has helped its steelmakers expand their global reach. Chinese construction companies building ports and laying railways in poorer countries have done so largely with Chinese steel.
Yet steelmakers in developing countries are also starting to grumble about Chinese exports. In August Thachat Viswanath Narendran, the boss of Tata Steel, India’s biggest steelmaker, complained of “predatory pricing" by Chinese competitors. As in the West, governments in the global south are taking notice. This month India announced that it would impose tariffs of up to 30% on some steel products from China. Brazil, Mexico, Thailand and Turkey have also slapped tariffs on Chinese steel this year. Vietnam, the biggest export destination for Chinese steel, is also undertaking anti-dumping investigations.
In response to both the worsening economic situation at home and the deteriorating trading environment abroad, China’s government has taken some steps to boost demand and reduce supply. It has offered incentives for Chinese businesses and households to swap old machinery and appliances for new ones. Last month it suspended approvals of new steel mills. But without more forceful reforms it is hard to see much changing. According to s&p Global, a data provider, more Chinese steel capacity will come online by the end of next year than will be shut down.
That leaves Chinese steelmakers with little option but to keep searching for new customers. Wood Mackenzie forecasts that Chinese steel exports will reach 103m tonnes this year. Some producers are also building new production bases in the hope of retaining access to foreign markets. In July China Baowu Steel, the world’s largest steelmaker, doubled its investment in a plant in Saudi Arabia. Tsingshan Group, a Chinese metals and mining company, has started production at a steel mill in Zimbabwe. That could worsen the global glut, but at least it creates jobs abroad.
Other Chinese steelmakers are shifting sales at home from the moribund property sector to manufacturers of things like electric vehicles—which also, as it happens, are looking abroad to compensate for lacklustre domestic demand. “Steel will always find a home," says James Campbell of CRU Group, a consultancy. Whether the world’s politicians like it or not.
© 2024, The Economist Newspaper Ltd. All rights reserved. From The Economist, published under licence. The original content can be found on www.economist.com
