China shutting down Steel capacity - BBH

Analysts at Brown Brothers Harriman explained that there are few industries that offer a picture glass window to see numerous macroeconomic forces as steel does.

Key Quotes:

"Excess capacity, trade policy, and the yuan all intersect when looking at the steel industry. Moreover, it also shed light on why the drop of energy and other commodity prices, such as iron ore, have not bolstered the steel industry, let alone the general economy, as many expected.

At the heart of the problem is that globally there is greater capacity to produce steel than demand. That excess capacity is not simply a function of the state planning effort of China. Rather Europe also suffered from excess capacity. It lost a quarter of its steel workforce since 2009. The slow growth in Europe sapped demand while exports from China are boosting supply. Last year, China's steel exports rose by 50%, while prices for some steel products fell by 50%.

China joined the WTO in 2001. It has argued that after 15 years, it should automatically be given market economy status. This particular designation is important because it would make it more difficult to pursue anti-dumping charges. The US argues that this is not an automatic process and that China does not yet deserve that designation. The European Union, in contrast, appeared to be looking to curry favor with Beijing, signaled was leaning to granting market economy status to China. The US argued this was similar to unilateral disarmament. Europe countered that it had other trade defenses.

In the past when countries want to challenge Chinese trade practices by filing charges at the WTO. Now China is encouraging the EU not to retaliate but to go to the WTO. It is not clear the logic, but when George W. Bush imposed steel tariffs in 2002, part of the logic was that, even if they violated the WTO (which they did), it would take a couple of years to sort it out. It might be the same logic for Beijing.

China has large excess capacity in numerous industries, and Beijing recognizes it. This is one of the things that scare governments and industries around the world. What is China going to do with its excess capacity? Some of the excess capacity will be shuttered. China reports that around 90 mln tonnes of steel capacity have been shut in recent years. It plans on cutting another 100-150 mln tonnes in the coming years. It is reportedly strictly controlling the building of new steelmaking capacity. Beijing says it is also beginning large-scale cuts in coal output, and halting new coal mine approvals.

However, the old problem of the divergence between China's declaratory policy (what it says) and operational policy (what it does) resurfaces. China has made similar pledges in the past. Premier Li may be more committed. He is announced that the government will set up a fund to help steelmakers and coal miners to reduce their workforce and dispose bad assets, on the condition that capacity is reduced."

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