China widely blamed for a global steel crisis

The US Department of Commerce is proposing a whopping 522 per cent duty on Chinese steel.

“That is an outrageous and flagrant abuse of the World Trade Organisation rules,” said my friend, an American steel trader. It was only after doing the research and running the numbers that I agreed with him.

China is widely blamed for a global steel crisis that has caused over 13,000 layoffs in the US and will likely cause the extinction of the British steel industry by the middle of the next decade. James Bouchard, CEO of US producer Esmark said on CNBC this week that “the Chinese will always make a lower price, there is no bottom, everyone else has said ‘no more’.”

Steel index prices are at a record low, down 71 per cent in a year according to Trading Economics. Global steel-making capacity is 2.4 billion tonnes a year but global demand is a measly 1.5 billion tonnes. Chinese mills produce over 800 million tonnes a year, exactly half of the world’s output. The global industry is fragmented and competitive. Europe meets 20 per cent of demand, the US 10 per cent , and the UK just over half a per cent. Global demand fell nearly 2 per cent last year, and will stage only a fractional recovery this year.

China’s centrally-organised economy encouraged the catastrophic over-building of steel mills in the 2000s, supported by a free rein on borrowing by local governments. It takes millions and years to build a mill and they have to run at full bore to make money — but today global capacity utilisation is only 68 per cent. The U.K. industry is losing £1 million each day. Steelmakers are desperate to sell every single extra gramme. Not surprisingly, Chinese imports into the UK jumped to 687,000 tonnes in 2014, from 303,000 tonnes the year before.

It was an Englishman, Henry Bessemer, who kick-started the Industrial Revolution by inventing steel in 1690. Steel was once part of the ‘commanding heights of the UK economy,’ with 350,000 employees in 1967. It now has less than 18,000, a tiny fraction of UK employment. In Wales today, workers are losing the jobs their fathers had before them, and their fathers before that, because European Union rules restrict government subsidies to rescue failing steelmakers.

In a free economy, steel companies must adapt to changing markets without artificial support. The UK government recently declined a proposal to assist Sheffield Forgemasters, which would have cost £500,000 for each job. It would have been cheaper to give each worker the money and tell them to go away. Wuhan Iron and Steel did this in March by telling workers to take a month off.