Why are Indian steelmakers betraying nervousness over Chinese gross domestic product (GDP) growth slowing down to 7% year-on-year in the first quarter of 2015?
The fear is as Chinese domestic steel consumption falls in sync with the downturn in industrial production, infrastructure development and house building activities, pressure will be building on local steelmakers to sell more and more in the world market.
China stepping up exports to India by as much as 232% to 3.611m tonnes in 2014-15 underpins the concern of the Indian steel industry that the arrival of such large quantities of metal from a single foreign source will leave a good portion of its capacity idle, besides unsettling the market here.
To borrow an expression from global investment bank Morgan Stanley, China is approaching ‘peak steel’ this year both in terms of production and consumption. China’s steel juggernaut in fact stopped rolling since last year when production grew only 0.9% to 822.7m tonnes against 7.5% in the previous year.
According to the China Iron and Steel Association (CISA), the country, accounting for nearly half the global steel production and consumption, saw use of the ferrous metal falling 3.4% to 738.3m tonnes last year.
Ahead of that for nearly a decade and a half, Chinese steel use grew at an annual average rate of 15%. Steel production growth in 2014 was the lowest going back 24 years.
The tectonic change in the Chinese steel scene became inevitable as Prime Minister Li Keqiang is steering the economy away from growth supported by high levels of debt to consumption-and services-led progress. Li’s spirited attempts to curb corruption among politicians and bureaucrats and also eliminate environment-polluting and inefficient industrial capacity will too explain recent falls in steel production and use.
Bringing discipline to a highly fragmented steel industry by capacity consolidation, especially in state-supported enterprises and scrapping of undesirable capacity is easier said than achieved in a country where provincial officials have mastered the art of dodging central fiats. For them local jobs protection takes precedence over keeping the environment clean.
Beijing will soon announce a new action plan for the steel industry under which 80m tonnes of surplus capacity is to be shuttered by 2017.
Moreover, steel is sought to be made a ‘zero energy growth’ industry in a move to control its carbon footprint, which is too large for Beijing’s comfort.
Inspired by ArcelorMittal, with a capacity of nearly 120m tonnes achieved through a series of takeovers in different continents followed by rehabilitation of acquired mills, Beijing wants 60% of its well over 1bn tonne capacity to be owned by 10 largest steel groups by 2025.
Progress in Chinese steel capacity consolidation should have happened by now but for non-cooperation by provincial satraps. Li’s resolution to discipline the growth-obsessed local governments and make the steel industry efficient enough to ride out commodity blues is now put on test.
In a recent statement, the CISA, going a step ahead of Morgan Stanley, said the country’s steel production has ‘already hit a peak’. The fall in the January-March quarter output by 1.7% from a year earlier to 200.1m tonnes, which is a maiden first-quarter slide since 1995, confirms the CISA observation.
But more importantly, as investment bank Goldman Sachs says in the biggest drop since the 2008-09 global financial crisis, China’s apparent demand for steel was down nearly 5% in the past six months from a year ago.
“What is scary is that more the domestic steel demand contraction, the greater will be the thrust on exports by Chinese steelmakers. Much to the discomfort of the industry here, steel margins have thinned, not least due to imports being up 75% to over 10m tonnes in 2014-15,” says Indian Steel Association president Chandra Shekhar Verma.
China apart, South Korea and Japan — exclusive beneficiaries of falling Indian customs duty on steel till it becomes nil by January 2017, thanks to our comprehensive economic partnership agreements (CEPAs) with the two Far Eastern countries — are selling growing quantities of steel here. India is also receiving much steel from Russia and Ukraine where major currency devaluation has made exports a highly paying proposition.
Steelmakers in the two countries are paying most of their bills like wages, raw materials and logistics in the rouble and hryvnia while their earnings from steel exports are in dollars.
Considering the dismal state of our steel industry and the challenge to raise capacity by about 200m tonnes in next 15 years, New Delhi should use economic diplomacy to get steel taken out from CEPAs and raise customs duty ideally to 25% to restrain imports. Falling domestic demand led China to sell 51% more steel at 93.76m tonnes in the world market in 2014.
Even while it has started producing less steel, its exports in the first two months of 2015 leapt 56.4% to 18.09m tonnes. China may already have arrived at ‘peak steel’, but it is unlikely that metal production will fall in line with contraction in domestic demand. After all, as Verma points out, China has surplus steel capacity of about 280m tonnes and capacity rationalisation is making slow progress.
Because of the continuing surge in exports, China is having scraps with steel producers in the European Union and the United States. Responding to petitions by Eurofer, trade association of the EU steel industry, the European Commission has imposed the provisional anti-dumping duty of 25.2% on stainless steel imports from China. The US steelmakers too have petitioned Washington, seeking protection from the dumping of Chinese steel.
The Indian finance ministry has made a provision in the customs manual, raising the tariff rate on steel imports from 10 to 15%. But what the steel industry desperately wants is a quick revision of import duty.
Kunal Bose is a former journalist with the Financial Times
The views expressed by the author are personal