China’s anti-dumping duties to lift profits for some domestic steel mills, but overcapacity remains a long-term problem

Duties seen as tit-for-tat action in ongoing global trade war

PUBLISHED : Sunday, 10 April, 2016, 5:14pm
UPDATED : Sunday, 10 April, 2016, 5:14pm

Beijing’s retaliatory imposition of anti-dumping duties on imported steel used in the manufacture of power transformers early this month will help boost domestic producers’ capacity utilisation, but analysts say it will take years to resolve the Chinese industry’s overcapacity problem.

Duties of 14.5 per cent to 46.3 per cent had been slapped on grain-oriented flat-rolled electrical steel (GOES) imported from Japan, South Korea and the European Union, the Ministry of Commerce said on April 1.

The duties are seen as tit-for-tat action amid an ongoing global trade war in the steel sector, with China, the world’s biggest steel producer and a rising exporter, taking much of the blame for allegedly flooding the global market with products at prices lower than they cost to produce, a claim denied by the Chinese government.

But all agree on the need to rid China’s bloated steel industry of excess capacity, with Beijing targeting cuts of 100 million to 150 million tonnes to China’s 1.13 billion tonnes of annual output capacity in the next five years, even though many doubt that will be enough to help restore global demand-supply balance.

Domestic [GOES] may be in short supply in 2016 due to domestic substitution [of imports]
CICC analysts

During a meeting with Foreign Minister Wang Yi in Beijing on Saturday, British Foreign Secretary Philip Hammond urged China to accelerate its efforts to cut steel production, British media reported.

Luo Tiejun, the deputy head of the raw materials department at China’s Ministry of Industry and Information Technology, told a conference on Saturday that China needed to shed 200 million tonnes of annual capacity “for the situation to be acceptable” if domestic output was to stay at the current level of roughly 800 million tonnes given Chinese consumption was projected at between 630 million and 700 million tonnes, Reuters reported.

GOES is used to make power transformers that increase or decrease the voltages of electric power applications, including long-distance transmission of electricity by power grids.

China imported 121,469 tonnes of GOES last year, of which more than 85 per cent was estimated to have come from Japan, South Korea and the EU, according to a China International Capital Corp (CICC) research report.

If imports from those nations were to be halved after the imposition of duties, total imports this year could fall by 40 per cent to 73,000 tonnes, it said.

“Domestic [GOES] may be in short supply in 2016 due to domestic substitution [of imports],” CICC analysts said.

If Chinese consumption and exports were flat this year and imports were to be fully replaced by domestic supply, Chinese production would rise by more than 4 per cent and capacity utilisation would increase to 94 per cent.

That would benefit Wuhan Iron and Steel most given it commands half of China’s 1 million tonne a year GOES market, followed by Baoshan Iron and Steel with a 30 per cent share. Both companies are listed in Shanghai.

It would also tighten the demand-supply balance of the product and push up domestic prices.

For every 1,000 yuan per tonne increase in GOES prices, Wuhan’s earnings per share could rise 3.7 fen, and that of Baosteel by 1.5 fen, CICC analyst calculated. The recent domestic price of the product ranged from 15,000 to 18,000 yuan a tonne.

Wuhan is forecast to make a net profit of 388 million yuan (4 fen a share) this year, compared with Baoshan’s 4 billion yuan (23 fen a share), according to analysts polled by Thomson Reuters.

Last year, Wuhan posted a net loss of 4.32 billion yuan, while Baoshan – one of China’s most profitable steel makers – saw net profit plunge 83 per cent to 961 million yuan.

China Iron and Steel Association secretary general Liu Zhenjiang told an industry meeting on Thursday that China’s steel industry raked up losses of more than 100 billion yuan last year, the most ever.

In the first two month of this year, total losses of 11.2 billion yuan were recorded and losses had been narrowing over the course of the first quarter due to rising steel prices, he added.

Beijing’s retaliatory move came 11 months after the EU imposed tariffs of 21.6 per cent to 35.9 per cent on GOES imported from China and other nations.

It also came two months after the EU launched anti-dumping investigations into more imported Chinese steel products including seamless pipes, heavy plates and hot-rolled flat sheets, and slapped provisional anti-dumping duties on Chinese cold-rolled flat sheets, citing “unfair competition from artificially cheap imports” that threatened its industry.

Li Hongmei, senior editor for metals and steel at information provider Platts said there were 36 new anti-dumping cases targeting China last year, with the EU initiating 16 anti-dumping and countervailing cases against Chinese imports.

China’s steel prices up over 15pc in rare rally after Beijing vows more easing measures to boost growth

Countervailing duties are used to punish nations accused of subsidising exports, while dumping refers to the practice of selling products at prices insufficient to cover costs.

Li said the latest case of Chinese anti-dumping duties against GOES imports and the growing number of cases launched by other countries was “a glimpse of worsening conditions in the global steel market”.

“Every [nation] is trying to use trade cases to protect their domestic producers when the steel market worldwide is facing oversupply … I can foresee that more nations will join in the trade war,” she said, noting Australia, Vietnam and Malaysia had launched investigations or imposed duties against Chinese steel.

China’s steel exports surged around 20 per cent to 112.4 million tonnes last year, after jumping 51 per cent in 2014.

China steel industry body sees tougher times ahead

Although exports accounted for only 15 per cent of China’s total steel production, much less than around 40 per cent in Japan, the sheer size of China’s steel industry meant its export volume was triple that of Japan, making it an obvious target for trade barrier action.

Li said the fact that steel mills in developed nations that traditionally focused on making high-end steel had also been lobbying for protection in lower-end products reflected the severity of the industry downturn, which sent all producers scrambling for market share in all product segments to stay afloat.

Overcapacity of the global steel industry meant some uncompetitive capacity, not only in China but elsewhere, needed to be retired, and the process would take years, she added.