During the US presidential election campaign, Donald Trump played his cards in a way that ensured support from the committed as also from groups whose income and jobs were allegedly under threat from low priced imports and American business-related work outsourced to countries such as China and India where per hour wage cost is significantly lower than in the US, writes Kunal Bose. Trump’s success in the rust belt states such as Pennsylvania and Ohio had got much to do with the rousing call he gave to infuse life in the American steel industry, which has greatly shrunk in capacity over the years mainly because of cheap imports. According to the International Trade Administration, the US has persistently remained deficit in steel products trade.

Because of the protests heard in every steel producing country of any significance and its recent annual exports in excess of 100mt (million tonnes), China is seen as the principal villain in selling steel in different markets at below production cost. But what is important to note is that a lot more steel flows in to the US from countries such as Canada, Brazil, South Korea, Mexico and Turkey than China. At 35.5mt, the US accounted for close to 9% of total global steel imports in 2015, thereby claiming the top spot among all importing countries. The shrinking of the US steel industry on production basis from 97.427mt in 1999 to 78.845mt in 2016 was as much due to high imports as because of some ageing high cost mills falling by the wayside in an increasingly competitive environment.

For identical reasons, the once formidable industry entities in many European countries, including the UK had perished. During this period China’s production grew from 123.709mt to 803.825mt. Rapid rises in Chinese steel capacity were for years supported by stunningly high rates of GDP growth. Steel was meeting with high demand as China rapidly became a factory to the world and infrastructure and house building claimed large investments. But 2012 proved to be the watershed year for both the Chinese economy and steel industry. Beijing, in an attempt to reorient the economy towards domestic consumption and away from investment and exports, would seek GDP growth of 7.5% in 2012.

Defending the lower growth trajectory, the then Chinese prime minister Wen Jiabao said: “The key to solving the problems of imbalanced, unco-ordinated, unsustainable development in China is to accelerate the transformation of the pattern of economic development...This is both a long-term task and our most pressing task at present.” Well ahead of China making a strategic shift in growth strategy, its steel mills were accounting for half the global production of the ferrous metal. With demand growth in steel slowing down in the wake of China veering away from industrial exports, the industry came under pressure to dispose the huge surplus steel in the world market at any cost. China allegedly selling steel products backed by hidden and not-so-hidden subsidies rendered steelmaking capacity idle in many places.

Take India, for example,. Here, before New Delhi started intervening by way of safeguard duty, minimum import price and finally anti-dumping duty on as many as 124 steel products, imports from China, Japan and South Korea were eating up almost the entire local steel demand growth. Steel surplus countries, particularly in Asia took advantage of low import duty regime in India prior to government interventions on repeated urgings of the injured local producers to sell as much metal as possible here. According to the World Steel Association (WSA), India’s imports during 2015/16 were 11.71mt, up 25.6% on 

9.32mt in the previous year, making it the world’s third-largest producer one of the ten largest importers. But post-New Delhi’s trade actions, all conforming to World Trade Organization rules, imports of finished steel fell by 37.8% to 6.097mt during April–January 2016/17 on a year on year basis. In the same period, exports were up 71.1% to 5.85mt.

A fall in imports and a simultaneous spurt in exports along with rises in steel prices brought relief to Indian steel mills, which during this period had to contend with a tepid 3.5% growth in domestic steel consumption to 68.892mt when production grew 9% to 80.716mt. The Indian steel demand growth is trailing WSA forecast by two percentage points. Justifying steel-related Indian trade actions,Tata Steel managing director TV Narendran says:“Over the years at huge investment India has built capacity of over 120mt. Why should it be made to suffer at the altar of unfair trade? Yes, exporting countries, including China have reacted strongly to New Delhi’s moves to stop dumping of predatory priced steel here. But we are ready to deal with any such reactions.”

Slapping of anti-dumping duty by any country is by regulation preceded by thorough official inquiries into complaints by injured parties of imports well below production costs but benefiting from government subsidy, open or otherwise. If the US and European Union are found more efficient in bringing select steel products under anti- dumping duty than India, it is because of close working relationship between government agencies and the industry, which supports complaints with thorough research. Maybe seeing how fast relief from ‘predatory imports’ has come the way of the US and EU steelmakers, Narendran is giving a push to leading Indian producers doing their homework ahead of asking government intervention in imports related matter.

A combination of political and economic developments, including the sudden deactivation of high denomination currency bills accounting for 86% of total note value on 8 November has slowed down India’s GDP growth rate by more than a percentage point this financial year ending March 2017. A fallout of that is deceleration of steel demand in the face of a good volume of new steel capacity coming on stream and production rising at a high clip. In the face of growing complaints from all over about unrestrained imports originating in China, that country’s Iron and Steel Association has turned aggressive in saying that efficiency and not subsidy has scripted the industry’s success.

Trade restrictions do not help China which, over the years, has built capacity in steel, aluminium and other industries to degrees whose successful operation demands free movement of goods across the frontiers. But haven’t many foreign businesses complained about rise in protectionism in China? Aware of this, Chinese President Xi Jinping chose the World Economic Forum in the Swiss resort of Davos to present himself as a champion of globalization and open markets. He said without naming Trump that “no one will emerge as a winner in a trade war,” and China “will keep its door wide open and not close it.”

A senior Indian steel industry official says that Trump’s harangues during the campaign trail would normally mean an impending trade war with China. One will be tempted to describe his outpourings at the hustings against imports as a call to the world’s largest and most powerful economy to become inward-looking. Trump said: “It will be American steel that will fortify the country’s crumbling bridges. It will be American steel that sends our skyscrapers soaring into the sky... We are going to put American-produced steel back into the backbone of our country.” From being a manipulator of currency to flouting of global trade rules,Trump heaped many criticisms on China threatening a 45% tariff on its exports. Noises made during election campaign to win sympathy of voters in a democracy are mostly forgotten when one ascends to power. What is true for the US also holds good for India. In any case, China is no longer quashing its currency to secure competitive edge for export of goods and services. Instead, it is strengthening. To go by what the White House website says, the Trump Administration instead of slapping a big blanket tariff on steel products and other goods originating in China and otherwise will “use every tool” at the disposal of the government to end trade abuses.

Trade actions besides,Trump’s signature proposal of $1 trillion investment in infrastructure has the potential to boost demand for locally made steel, especially of long products. Consultancy Jefferies estimates a 6% increase in US steel consumption will follow a $100bn of increased annual infrastructure spending. But this will be conditional on the US moving to block imports of low-priced steel, particularly from China without appearing to be protectionist. Tom Gibson, president of the American Iron and Steel Institute, said he was looking forward to work with the new administration “to ensure a level playing field for the steel industry.” Months ahead of Gibson,Tata Steel’s Narendran said “Indian steelmakers are not seeking protection but a level playing field.” Incidentally, some Indian producers, including Tata Steel and JSW Steel, rank among the more efficient and cost effective steelmakers in the world.

The two major worldwide criticisms that the Chinese steel industry has been facing relate to overcapacity at around 1.3bn tonnes and production amounting to half the world output. 

Investment banker Morgan Stanley says rising trade cases in several countries against its dumping will put pressure on China to curb production. Steel and coal industries have been served notice by Xi Jinping to care for environment and shut the polluting mills and mines. Morgan Stanley is confident of China achieving its 150mt permanent capacity cut target by 2020. This is backed by the country scrapping around 70mt capacity in 2016, far exceeding the year’s 45mt target. Ideally, China should be having a target of shedding around 300mt capacity since it is said to host half of the world surplus capacity of 600mt.

Unlike the EU, which has ArcelorMittal to uphold for benefits merger offers and Japan Nippon Steel & Sumitomo Metal Corporation, China woke up to the need for capacity consolidation only recently. But the fundamentals of the Chinese industry will significantly improve once the merger between Baosteel and Wuhan Iron and Steel happens and regional consolidation plans take off in a meaningful way. What is happening in China could in turn improve the return on equity in the global steel sector to 12% by 2020 from 2.9% in 2015, says Morgan Stanley.

Consolidation remains an ongoing process in the EU.Take the heavy loss making 10mt Ilva. The Italian government nationalized Ilva “temporarily” in the hope of finding a consortium of buyers which will not only turn it around but also ensure that its production turns environment friendly. The two serious  consortium bidders for Ilva are one led by ArcelorMittal and the other by India’s JSW Steel. In the meantime,Tata Steel, which recently sold its UK speciality steel business to Liberty House is seeking to merge its European assets with ThyssenKrupp. But the German group will not agree to the marriage till Tata Steel is able to get the regulatory approval to spin off the 15bn pound pension scheme into a standalone entity.

Unlike China, which invites criticism for building capacity considerably in excess of domestic requirements, India’s plan to create 300mt capacity by 2030 against the present 120mt is based on a realistic assessment of future steel use by different sectors. Per capita steel consumption in India at 60kg compares unfavourably with global average of 208kg. India will need growing quantities of steel as it aims to build a global class infrastructure and become the second-largest factory to the world after China. In support of this, the chairman of Steel Authority of India Limited (SAIL) PK Singh says:“The government plans to raise the country’s per capita steel use to 160kg by 2030/31. And for meeting this level of consumption, the industry capacity is to be lifted to 300mt.” Expect both Tata Steel and JSW Steel to become 40mt capacity enterprises by then. SAIL with a big land bank at its disposal and also captive iron ore mines is targeting crude steel capacity of 50mt from 21.4mt to be achieved this year on completion of its ongoing modernization cum expansion programme.