Steel is essential to the modern world. It’s used to build buildings, roads, railways, and other infrastructure. For a developing country, steel is also essential for economic growth.
Steel production was a major pillar of Mao Zedong’s Great Leap Forward in 1958, when China took measures to modernize and industrialize the economy. The experiment didn’t end well, as they quickly learned that a bunch of small mills in people’s backyards was not the best way to produce steel.
Once they abandoned that idea, China’s economy, and steel production, grew. To fuel this growth, China poured massive amounts of money into construction, and it urged the country to expand steel production rapidly to match the growing economy.
This time the plan worked. China has relatively quickly become the second largest economy and the biggest steelmaker in the world. With a GDP of US$10 trillion, they account for roughly 13% of the global economy. Chinese steel production was 823 million tons in 2014 – accounting for half of the world’s total.
But now China’s economy is slowing down. The latest five-year plan focused on moving the economy from a focus on industrial production to consumption. They want more focus on improving living standards and dealing with their environmental problems. And importantly, the growth target dropped from 7.5% to 6.5%. (In a US$10 trillion economy, that 1% difference equals US$100 billion – that’s a lot of money for anyone.)
With less focus on rapid growth (even though 6.5% is still pretty high) there is less incentive to invest in construction. This has driven down the demand for steel, with the result being global steel prices slumping to a 10-year low.
The World Steel Association said China's demand for steel dropped 3.5% in 2015, and will fall again in 2016. This has forced Chinese steelmakers to look outside the country for customers to buy all their extra steel. As a result, in 2015 China steel exports increased 25% to 112 million tons. That’s more than any other country’s (except Japan’s) total production. Their production costs are also subsidized by the Chinese government, so they are covered even if they produce steel at a loss.
To the rest of the world, if something is “Made in China” it is usually considered cheap and low quality. Because it’s cheap, it can also disrupt the local market and domestic producers. China’s steel is no different (no comment on the quality, just the price.) They have been flooding the global market with steel that is 20% to 50% cheaper than anything else.
Many foreign steel companies have shut down their mills or stopped operating entirely as a result. For example, Tata Iron and Steel company, the largest steel plant in the British Commonwealth, plans to sell or shut down their British operations;
But western countries don’t want to let Chinese steel hurt their local production. Steel production in these countries costs more because of higher labor and environmental costs. So, they are vulnerable to these cheaper steel imports. Since steel production is vital for industrial growth, if local steel producers suffer, their whole economy will suffer.
To protect their domestic production, and to retaliate against what they see as unfair “dumping” of cheap Chinese steel on world markets, some countries have begun imposing heavy tariffs on Chinese steel. This includes tariffs of 20% in India, 46% in Britain, and 236% in U.S. If the tariffs slow down Chinese steel imports, China will no longer be able to flood the market with excess steel.
There are now thousands of steel mills in China, and it’s not easy to shut them down immediately just because of slowing demand and higher tariffs in the developed world. Plus, local governments simply don’t want to shut them down and have a bunch of unemployed steel workers on their hands. The latest five-year plan stated that the government wants to help with this by setting a goal of moving half a million people out of sectors like steel-making, but this process is going to be painful.
In the meantime, expect steel prices to stay low and tariffs on steel imports to stay high.