Business

What's behind China's cheap steel exports?

  • 25 April 2016
  • From the section Business
Chinese steel factory Image copyright Getty Images
Image caption Slowing demand means overproduction

Cheap steel from China has been blamed for distorting global markets and putting other countries' steelmakers under pressure. How have we got here and why does it all matter?

China's steel industry - what's the problem?

Chinese steel production has expanded hugely. Over the past 25 years, output has grown more than 12-fold. By comparison, the EU's output fell by 12% while the US's remained largely flat.

China's steel production
Year Output (million tonnes)
1990 66.4
2000 128.5
2010 638.7
2014 822.7
Source: World Steel Association

The drive behind that stellar increase has been China's double-digit economic growth over the past decades. That led to ever more domestic demand for steel and the government invested heavily in the industry during the boom years.

But that demand has been severely hit by the current slowdown, leaving China with more steel than it needs. It produced more than 822 million tonnes of steel in 2014 and is expected to produce even more this year, yet projected demand for its steel in 2016 is only 672 million tonnes.

Chinese steel is therefore sold on the international market at extremely low prices - critics say it's sold at a loss. As a consequence, other countries' steel plants find it increasingly hard to compete.

What is China's position?

China dismisses claims that its steel is sold at a loss and says it has done what it can to curb overproduction.

Beijing's official news agency said that blaming the country for the global steel industry's problems was a "lame and lazy excuse for protectionism".

In a commentary piece, Xinhua warned against the imposition of protective import tariffs (a tax on the product which ultimately makes the finished goods more expensive for the consumer).

"Blaming other countries is always an easy, sure-fire way for politicians to whip up a storm over domestic economic woes, but finger-pointing and protectionism are counter-productive," it said.

What is China likely to do?

Very little. While other countries complain that cheaper Chinese steel is forcing their producers out of business, China is itself faced with severe problems in the industry.

The boom of past years means any substantial output cuts would lead to huge job losses, and potential social instability.

It is unlikely that China will cut output by a lot and unless domestic demand picks up, cheap exports will continue to affect global markets.

Image copyright AFP
Image caption Overproduction means cheap exports

What options do other countries have?

A simple response would be setting up higher import tariffs. So if a Chinese manufacturer offers a tonne of steel at a cheap price, the importing country charges a tax on top of the original price, which makes it more expensive for the importing company.

That would make Chinese steel more expensive in the importing country and would therefore make domestic producers more competitive again.

Steel-producing countries India, the US and Indonesia have already raised their import tariffs on steel from China.

But for European countries that is a tricky path to embark on as China is a much bigger trading partner. Introducing higher tariffs could risk triggering a trade war of tit-for-tat import tariffs on all kinds of goods.

Does all this matter to me?

Yes. Steel is a vital ingredient to countless producing industries in every country around the globe. That's anything from cars to construction and toys to bottle caps.

So for those industries, cheap steel is good - regardless of whether it's from China or their own domestic producers.

However, if you work in the steel industry in, say, Europe or the US, then of course cheap Chinese steel can drive your company out of business - and you out of a job.

But if you're a steel worker in China, then of course you don't want Beijing to cut production and curb exports. Because while that might save European jobs, it might cost you yours.

Image copyright Getty Images
Image caption Do cheap exports mean market distortion?

Is there a national security question?

Steel is crucial for the defence industry - just think ships, planes or tanks. So there's the question of whether it is wise to shut down domestic production and import all steel.

Even if it is cheaper to do so, there is the question of whether you want to depend entirely on imports when it comes to one of the ingredients you need for national defence.

Any intentional or unintentional cut in supply could quickly leave you in a vulnerable position.

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