China’s steel industry is in a period of transition. Blighted by oversupply, actual production is unlikely to slow in the near-term as Beijing aggressively pursues a strategy of consolidation that will eliminate small-time operators responsible for the industry’s inefficiency.
Having turned itself into the world’s largest steel producer, China now wants to be the world’s most efficient.
But according to a widely distributed new study, this rise to global player status has been possible thanks to enormous state subsidies. The study, published in July by Wiley Rein & Fielding for the American Iron & Steel Institute, the Steel Manufacturers Association, the Specialty Steel Industry of North America and the Committee on Pipe and Tube Imports, was intended to have an impact.
With China beginning to carve a niche for itself as a steel exporter and a major commodities powerbroker, the shockwaves may well push Washington into seeking action at the WTO.
"It’s gone out quite wide and will probably get a reaction from the US," said Steel Business Briefing’s Richard Herselman .
This reaction could come in the form of an anti-dumping action by US stakeholders on the grounds that China’s massive steel industry is a government creation that has "benefited from massive direct and indirect subsidies."
Steel production in China jumped to 67.2 million metric tons (mmt) in 1990, the fourth largest in the world. Fast forward 15 years and China is on a league of its own, producing 394.4 mmt of steel in 2005, about a third of all global output.
By the end of 2005, Chinese steel exports more than quadrupled from 1998.
No matter what the ultimate intention, the study is unlikely to impact the consolidation trend in China’s steel industry.
There are currently hundreds of small-scale mills scattered throughout the countryside – 1,045 in 2000 – but not a single producer is among the world’s top five.
As amalgamations and mergers become the order of the day, production is becoming more streamlined but there are still inefficiencies that have become ingrained through decades of a shotgun approach to production. Some mills have amalgamated while maintaining entirely different sales and management teams.
"It’s the way we want China to go but so far most of it is not very effective consolidation," said Herselman.
By the end of the year, the government hopes to have reduced production, eliminated small mills and taken steps towards a streamlined industry. China’s steel regulators have publicly set consolidation targets that would see production cut to about 400 mmt. But this is not easy to achieve.
So far, consolidation has only amalgamated production, not cut it. Steel output was 36.1 mmt in July, up 22.2% year-on-year, according to the World Iron and Steel Institute. And, as things stand now, net production next year is actually likely to go up by 50 mmt.
"There is too much steel in China at the moment but not to any level that is unworkable," said Herselman. "If it’s unmanaged it could become a problem."
Subsidies may be a big issue for American competitors but, with three times as much production capacity, China’s industry is in a league of its own and the problems it faces will have to be solved in-house.