This time, China’s policy makers promise, will be different.
For years, they have pledged to sop up the oceans of excess space at steel mills, saying they would solve overcapacity problems already described in 2009 as a “crisis” and a “blight on China’s industrial landscape.”
Instead of declining, China’s steel makers doubled in size after 2009. In 2013, one Chinese province added twice the capacity it slashed. The cutback mantra was a hollow slogan.
Now China is rolling out one of its most ambitious capacity reduction projects, this week predicting massive closures that will leave 500,000 without jobs. The changes promise relief to a suffering global steel industry that has shed thousands of jobs and made Chinese steel the subject of 37 anti-dumping investigations last year, including in Canada.
But skeptics, inside and outside China, aren’t sure they buy Beijing’s new promises, which must overcome major obstacles, and remain well shy of the dramatic cuts that are needed.
China’s leadership has said it will cut between 100 and 150 million tonnes of annual production capacity over the next half-decade, and this week rolled out a plan to cope with the fallout, with 100 billion yuan ($2-.5-billion) in spending to relocate 1.8 million workers from sputtering coal and steel regions.
But even inside China the reduction target, which amounts to 13 per cent of steel capacity, is seen as too weak. Based on 2015 data, the industry holds about 400 million tonnes of overcapacity – or 65 times Canada’s entire crude steel output last year.
“This goal will definitely be reached in the next five years, but I don’t think the scale is sufficient,” Zhao Xizi, the former honorary chairman of China Chamber of Commerce for Metallurgical Enterprises told Chinese media last week.
Last year marked the first in a quarter century that Chinese steel output decreased. But the country’s exports rose as desperate steel makers sought new markets.
And by Mr. Zhao’s calculations, even a 150-million-tonne cut will still leave the industry at a 70-per-cent utilization rate five years from now – not enough to perk up prices. Mr. Zhao called for a 250-million-tonne capacity cut.
The industry, though, remains less than willing to take a scalpel to itself.
Surveys done by Shanghai-based Huatai Great Wall Futures Co. show that domestic steel mills “are forecasting capacity reductions, but seem to feel it won’t happen to their own companies,” said Huatai analyst Xu Huimin. “So based on what we have heard, I don’t think we will see much change in the short term.”
Outside China, meanwhile, Chinese producers face a growing backlash over the volume of their product landing on foreign shores. The Canada Border Services Agency set preliminary duties on Chinese carbon and alloy steel line pipe of 71 to 396 per cent in November, after finding that market share for the country’s product had risen from 47 to 56 per cent in three years. Several other anti-dumping cases are currently before the Canadian International Trade Tribunal. In April, the Organization for Economic Co-operation and Development (OECD) Steel Committee will meet to discuss steel-making overcapacity.
The OECD steel industry places its woes on China’s shoulders.
“The narrative from OECD countries is, if it’s not directly Chinese dumping – and it is, in massive volumes in certain of these markets – then it’s price degradation coming out of China that’s killing everyone’s bottom line,” said Joseph Galimberti, president of the Canadian Steel Producers Association.
He cited data from the China Iron and Steel Association showing the country’s large and medium-sized mills lost 53.1-billion yuan ($11-billion) in the first 11 months of 2015 alone. Mr. Galimberti called on Ottawa to more aggressively combat Chinese steel dumping, and to raise it with Beijing at G8 and G20 meetings this year.
China’s “steel employment as a social program is unsustainable for world steel producers,” he said.
China has experience in addressing this kind of situation: in the 1990s, premier Zhu Rongji led a shakeup of state-owned enterprises that resulted in 40 million job losses.
“With retraining, relocation, early retirement and the right social safety nets, they can take an issue that’s getting worse and deal with it now rather than having to kick the can down the road,” said Adam Dunnett, secretary-general at the European Union Chamber of Commerce in China, which recently released a massive report on Chinese overcapacity. “It’s tough, but it doesn’t mean you shouldn’t tackle it.”
Growth in steel capacity has been driven by regional governments eager for industrial jobs, and China’s central leadership will have to impose its will against regional interests if it is to press through difficult change.
But the willingness to spend so heavily on displaced workers suggests China is preparing to fight those battles. Premier Li Keqiang has repeatedly called for deeper capacity cuts amid plans to shut down steel mills on environmental, safety, efficiency and quality-control grounds.
“We can see that the new standards and policies on capacity reduction are coming at the issue from all sides,” said Wang Guoqing, director of the LanGe Steel Research Institute in Beijing. “The force the government is exerting this time is different from previous attempts.”
But the world’s steel makers may have to get used to China flooding markets.
Paul Bartholomew, senior managing editor at commodities data provider Platts, expects Chinese steel exports to decline just 2.5 per cent this year. Some of the capacity-cutting techniques being used in China, such as pushing for corporate consolidation, haven’t proven successful in the past, he said.
And it remains unclear whether Chinese leadership will put words into actions that produce painful mass layoffs, with their attendant risk of social instability. “There are some psychological barriers that need to be crossed if they really want to be serious about job losses,” he said.
With reporting by Yu MeiReport Typo/Error