Mohammad Asad
001109-018
Extract Number 4
China steel supply outpaces demand
By ANDREA HOLECEK | Sunday, March 11, 2007 12:06 AM CST
China's soaring steel production and its steel exports could cause havoc in global markets -- and, many in Northwest Indiana say, with local jobs -- if its excess supply continues to outpace its internal demand, according to industry experts.
China's crude steel output is expected to be 480 million metric tons this year, up 13 percent to 15 percent yearly since 2006, according to U.S. trade data. The country of more than 1.3 billion people in 2006 produced 418.8 million metric tons of steel, an increase of 65.4 million tons from a year earlier and more than three times its 2000 production
Last year, China produced four times as much steel as the United States, which has a population of about 300 million. And during the past two years, China has produced more steel than the world's next four largest producers combined. But because China has not been able to absorb all the steel it produced and hasn't shuttered its excess capacity, steel exports continue to grow.
Even though the country's steel consumption increased 20.1 percent per year from 2000 to 2005, domestic over-capacity is the largest problem haunting China's steel market, according to Shanghai-based GroWell Research and Consulting.
The organization said it expects Chinese exports to increase to about 52 million metric tons in 2007 because of the over-supply. Thus, export growth is expected to continue until supply and demand are in sync through increased consumption.
David Phelps, president of the American Institute of International Steel, said there are steel companies in China that are inefficient and polluting, and they need to be closed.
"They have 80 to 100 million metric tons of steel that needs to be shut down," he said Feb 15. "The Chinese central government says that. That capacity is heavily likely to have defacto subsidies that keep them operating."
Phelps has said the Chinese steel industry has grown to its current size due to market-based reforms of the Chinese economy that began in the 1980s.
"I don't think there's any question that demand will pick up to absorb it (excess capacity)," Phelps said. "China's GDP and consumption are growing at staggering levels. In 2006, capacity was running ahead of consumption.
"What that did in China is up set plans to bring capacity in line with consumption, so prices decline. Competition is very stiff in China's steel market."
In a rebuttal to the American Iron and Steel Institute-commissioned study on China's steel industry, released in mid-2006, Phelps stated, "For the past several years, the central government has attempted to slow the fast-growing juggernaut, but these attempts mostly were foiled by basic, untamed capitalist-driven economic growth and uncooperative, provincial and local government entities.
"From our perspective, if China can successfully close its inefficient and polluting capacity, the excess capacity problem will be solved and China will again become a major importer of steel," he said. "The question is, how long will it take for the central government to accomplish this important goal?"
Peter Morici, professor of economics at the University of Maryland's Robert H. Smith School of Business, said China's current policy concerning its steel industry doesn't make any sense. That policy requires the state to keep controlling shares in steel companies.
"They say they're not, but they continue to subsidize capacity," he said. "They don't have coal in large enough quantities, they don't have good quality iron ore in large enough quantities, or metallics. They pay they same capital costs as we do to build a steel mill, but they continue to subsidize the industry."
Chinese steel makers pay more per ton to ship steel to the West Coast of the United States than the $125-per-ton cost of the labor content in U.S. domestic (integrated) steel, or more than the entire processing costs of a minimill, he said.
"They subsidize to the point where they produce more than they can consume," Morici said. "They shouldn't be producing so much, because the balance sheet doesn't work. Prices don't make sense in China because they don't reflect the true cost of making things. They're basically subsidizing their heavy industry to put people to work, and that takes jobs from people in Indiana."
Steel analyst Charles Bradford said China's steel exports are about 10 percent of China's entire steel production, and as such are "relatively small."
"The danger comes with the amount of higher-grade steel products being exported," said Bradford, president of New York-based Bradford Research. "We should be worried to a limited extent, but it's our fault because we pushed the Chinese to raise the value of RMB (China's Yuan currency), which pushed them into the high-end market where our companies need to be."
