Not American, but Chinese Steelmakers Have a Problem

Skeeze || Creative Commons

Imagine that your neighbor would start bringing you a tasty dinner every evening. Just like that, not even hoping for a “thank you”. Suddenly, you could spend the evening reading a book, or playing with your children, instead of cooking. You would even save some money on your groceries shopping. A fairy-tale story! Until the politicians give it a name – dumping.

Most of reality-conscious politicians accept one of the building blocks of economic knowledge – the fact that free trade increases welfare. How to appease the local pressure groups and impress the protectionist believes of your voters? There is one ace left – the dumping accusation, or in other words, an accusation of undercutting the “fair” market prices and thus harming the local producers.

Some time ago it was about the Chinese solar cells, now it’s the Chinese steelmakers vs. President Trump. He built a part of his presidential campaign on the story of “the cheap Chinese”. Nevertheless, there is one problem. Dumping is a very expensive and risky strategy. Sometimes it pays off – e.g. Henry Ford jumped into the leading position in the automotive market (and motorized the U.S. as a side effect) by dumping Model T. But even Ford did not destroy his competition.

Let us look at some facts about the U.S. steel market. Reading the headlines, one cannot stop believing that China is doing nothing else except loading cargo ships with steel heading for the U.S. Quite the contrary. Less than 1% of Chinese steel export is heading towards the U.S. The U.S. is the 25th most important partner for Chinese steelmakers – the majority of Chinese steel goes to Korea, Vietnam, and other Asian states. The insignificance of the steel export is mutual. Imports from China cover less than 1% of US consumption and China is the 10th biggest steel importer into the States. The U.S. imports around one third of its steel consumption, mainly from Canada. There was a 20% import slump between 2015 and 2016, and Chinese imports fell even more: by 70%.

Chinese steel is a typical strawman for U.S. politicians. Employment in the U.S. steel industry fell dramatically indeed. There were around 780,000 employees in the sector in the late 1960s and the industry was producing 115 million tons of steel. Today, there are less than 100,000 employees. But the industry still produces around 80 million tons of steel annually (!). That means a higher production would bring only a few thousands new jobs.

China is the one having problem here. Industry is still part of the central plan. What do planners do, when they see that pouring concrete raises the GDP? Well, they pour more concrete. For example, into the new steel mills. Steelmaking capacity in China grew by 100% in a decade. Domestic demand is the biggest market for Chinese steel. As the infrastructure boom started to lose its momentum, the massive overcapacity of steel mills started to be obvious. Today, one third of the one billion tons (making it the biggest steelmaker of the world by a comfortable margin) capacity lies idle.

To rub salt into the wound, most of Chinese steel mills run on coking coal, the price of which has grown significantly since the summer of 2016. On the other hand, 63% of steel production in the U.S. comes from electric arc furnaces. You can only imagine what are the U.S. electricity prices…

China plans to cut its capacity by 200 million tons in the coming five years. Meanwhile, Chinese mills are pushing the price down. What a great opportunity not only for the U.S. aircraft, arms, vehicle, shipbuilding or construction industry to take advantage of the alleged dumping and become more competitive!