China's Steelmakers Push Back on Downsizing

The industry sends mixed signals on capacity cuts.

Chinese workers pack cold-rolled steel coil at a steel company in Zhangjiagang in China's coastal province of Jiangsu, April 27, 2018.

China's steelmakers may be trying to push back their timetable for cutting excess production capacity, three months after the government promised to speed it up.

The shifting of target dates and production totals appears to be an attempt to preserve China's overwhelming share of the global steel market while easing international pressure on its producers to make cuts.

China's huge surplus of steel capacity has been a constant problem for foreign competitors and a hot issue behind the U.S. decision to slap a 25-percent tariff on imports. A recent statement from China's producers may only add fuel to the fire.

In a speech published on May 18, the president of the China Iron and Steel Association (CISA), Yu Yong, said the country would lower its annual production capacity to less than 1 billion metric tons by 2025, according to Reuters.

China's industry had already reduced capacity by as much as 120 million tons since 2016, when the government ordered 100 million to 150 million tons in cuts by 2020, Yu said.

Despite the apparent compliance, Yu's speech raised a host of questions, since the industry's current capacity has already been estimated at less than 1 billion tons.

In a separate report on May 16, Reuters estimated China's crude steel capacity as about 950 million tons, exceeding its 2017 production of 831.7 million tons.

Last year, China accounted for 49.2 percent of global output, according to the World Steel Association. China made nearly eight times more steel than second-ranked Japan.

Under pressure, the Ministry of Industry and Information Technology (MIIT) said on Feb. 7 that China would complete the 150 million tons of reductions this year, two years ahead of the 2020 schedule.

The CISA's target date of 2025 appeared to be at odds with the accelerated timetable, leaving it unclear whether China is speeding up cuts or slowing them down.

Confusion over the starting point for reductions and capacity totals have complicated the conclusions.

Estimates based on National Bureau of Statistics (NBS) data suggest that the country's production capacity is already at or near the 1-billion ton mark.

In a posting at the Peterson Institute for International Economics last June, research analyst Zhiyao Lu noted that the NBS statistical yearbook for 2016 listed crude steel capacity as 1.1269 billion tons.

The claimed cuts of 115 million to 120 million tons would bring the total close to 1 billion, leaving little or no downsizing to be done by the CISA's target date of 2025.

But the CISA cast further doubt on the pace and direction of industry shutdowns by citing a higher capacity estimate of 1.2 billion tons in 2016 as the starting point for reductions, essentially adding over 70 million tons of slack.

In April 2016, a senior MIIT official said that China's crude steel capacity stood at 1.13 billion tons, Reuters reported at the time.

In an email message, Lu said the government has frequently lumped together iron and steel data when reporting the reductions, an inconsistency that she noted in her posting last June.

If the CISA is mixing iron capacity figures in with some of its crude steel totals, it may be hard to determine whether the industry is meeting any of the steel targets.

"I think China's capacity cut numbers tend to create some confusion, so it is difficult to assess China's capacity reduction progress," Lu said.

Cranes prepare to load steel pipes for export at a port in Lianyungang in coastal China's Jiangsu province, May 31, 2018. Credit: China Daily via Reuters
Questions from the start

The success of the government's downsizing initiative has been subject to questions from the start.

In 2016, the government claimed that steelmakers had exceeded the annual shutdown target of 45 million tons by idling 65 million tons of production capacity. Steel prices rose with concerns of tightening supplies.

But a study sponsored by Greenpeace East Asia last year found that 54 million tons of the idled production reopened to take advantage of the rising prices.

In 2017, officials claimed that the annual reduction target of 50 million tons was achieved by last August. But whether the numbers included double-counting from 2016 was hard to tell.

This year, the downsizing target has been set at 30 million tons, but the total includes both iron and steel capacity, the official Xinhua news agency said on May 21, citing a government work report.

Meanwhile, China's crude steel production has continued to climb, rising 1.2 percent in 2016 and 5.7 percent last year, according to NBS data. The results make the case that capacity cutting, so far, has been largely irrelevant.

Over the first four months, output is up 5 percent this year from the year-earlier period with record production in April.

The industry posted gains despite government-ordered shutdowns to curb smog in the industrialized northern region during the winter heating season that ended on March 15.

On April 27, the CISA's secretary general, Liu Zhenjiang, issued a warning against overproduction, Xinhua reported.

"Many steel plants profited from price rises last year, and they want to make more money this year. But they ignored that China's economic growth has transitioned from a rapid pace to a stage of high quality development," said Lu.

"Steel plants should rein in output rises and speed up destocking," he said.

The South China Morning Post reported that the CISA blamed the production surge on output by non-member mills, which rose 17.2 percent in the first quarter from a year earlier.

In his speech published by China Metallurgical News, Yu appeared to acknowledge the ineffectiveness of the capacity cutting targets.

"In the future, China's overall steel demand will fluctuate downwards and overcapacity is likely to persist for a relatively sustained period of time," he said.

"Overcapacity has not been solved fundamentally," the CISA said, according to the SCMP.

China argues that the problems of overcapacity and overproduction are largely its own since it exports only a small percentage of the steel that it makes.

But as domestic demand drops, more steel has been pushed onto foreign markets, which have been buffeted by the secondary price effects of domestic oversupply.

Steel exports rose in April despite a 25-percent U.S. tariff that took effect March 23, Reuters reported. Exports of steel products jumped 14.7 percent from a month before, it said, citing China's customs data.

US industry complaints

Based on U.S. Census Bureau data for the first quarter, China ranked eleventh as a source of steel imports behind countries including Canada, South Korea, Mexico, Russia and Japan. Imports of some 57,000 tons of Chinese steel rose 4.5 percent in volume and 6.3 percent by value from the year-earlier period.

Last year, U.S. imports from China of 740,000 tons accounted for only 2 percent of total imports, according to Census statistics.

But there have also been signs that China's surplus has been diverted to other countries and finding its way to the United States after processing.

On May 21, the Commerce Department backed U.S. industry complaints about diversions of Chinese hot-rolled steel, imposing anti-dumping duties of nearly 200 percent on corrosion-resistant and cold-rolled steel from Vietnam.

After Commerce slapped anti-dumping duties on Chinese steel products in 2015, cold-rolled steel shipments from Vietnam soared from U.S. $9 million (57.3 million yuan) a year to U.S. $215 million (1.3 billion yuan), Reuters said, citing the decision.

In the first quarter, U.S. finished steel exports from Vietnam fell 27.9 percent from a year earlier, but imports in March jumped 147.3 from February, the American Iron and Steel Institute said.