THE two giant furnaces at Port Talbot steelworks, Britain’s biggest, were still hard at work this week, pouring out vast quantities of molten iron. But production of steel from iron ore here may soon come to an end. At the end of March, the plant's owner, Tata Steel, said that the operation was losing more than £1m ($1.45m) a day due to the low price of steel on global markets, and that it planned to sell off or close down its British operations as it could no longer shoulder the losses; bidders were given until May 3rd to state whether they were interested in buying it. (So far two bidders have gone public, one a management buy-out and a second by Liberty House, an international metals group.) Britain’s steel industry is not the only one in the West feeling the pinch from low steel prices. Both Belgium and Italy are spending public money to keep their steel mills open and the American industry there has been announcing a steady flow of job losses. Too much supply and not enough demand has been blamed for the falling prices. So what is causing the world’s glut of steel?
The collapse in the price of steel is mainly the result of falling demand and, until recently, rising production in China, says Edwin Basson of the World Steel Association, an industry group. Between 2000 and 2014, global production doubled from around 800m tonnes to around 1.6 billion tonnes a year, mainly driven by rising output in China. Until 2014, Chinese demand rose at approximately the same rate as its steel mills could produce, meaning that the impact on the rest of the world was limited. But as its construction boom came to an end, demand sagged, prompting the country’s state-owned steelmakers to sell their growing surpluses on foreign markets. Exports of steel from China increased from 45m tonnes in 2014 to 97m tonnes last year—marking a bigger rise than Germany’s entire output of the past year: 43m tonnes. This has triggered demands from rival firms for protection, from what they see as dumping.
Many economists argue that government subsidies are responsible for the overcapacity in the industry lasting so long. The flood of Chinese steel around the world should have caused high-cost producers elsewhere to extinguish their blast furnaces, eventually allowing supply and demand to reach a new equilibirum. But because steel is often seen as a strategic industry, providing lots of jobs in areas where there are few other employers, governments are usually keen on propping them up, either through subsidies or nationalisation. China has overproduced steel for so long because regional Communist Party officials, who control local steel plants, prefer to subsidise their local plants to keep them open rather than risk the unemployment and unrest that may follow shuttering them. In Europe, Italy has spent €2 billion to support the Ilva steel mill in Taranto. And even in Britain, where nationalisation has long been out of favour, the Conservative government has expressed a willingness to take a 25% stake in the Port Talbot steelworks.
Rising steel prices in America and Europe since January have raised hopes that plants such as Port Talbot may soon be able to break even without any government assistance. But many commodities and metals analysts predict this will simply encourage Chinese plants to increase production again, causing more overcapacity and lowering prices again later this year. Last month the OECD, a club of rich countries, convened a bunch of ministers in Belgium to discuss measures to deal with the crisis. But until countries stop subsidising their plants, or imposing tariffs to artificially raise prices, progress towards ending the steel glut will be slow.