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Mar 10, 2003

Steel sector recovery remains fragile

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© Reuse this It is remarkable what a period of just one year can have on the fortunes of a cyclical commodity such as steel. At the beginning of last year, steel prices were languishing at between $150/t and $170/t; lows previously witnessed three decades earlier, and well below the cost of production of many, if not most, steel plants globally.

Undeniably, the global steel industry was in deep crisis. Overcapacity, overproduction and continual fighting over market access, subsidies and protection being at the root of the troubles. At the same time, the world’s single largest steel consumer, the US, had signalled that it would respond to this crisis by making moves to shut out imported steel so as to salvage its embattled local industry.

Indeed, the crisis had focused the minds not only of the US, but also those of the entire steel world.

International Iron and Steel Institute (IISI) secretary-general Ian Christmas summed up the scenario by suggesting that the very survival of the industry was in serious doubt. He called on government to respond by staying out of decisions to build new capacity; assisting firms in dealing with the costs associated with permanent closure of plants; eliminating State subsidies and loans to unviable facilities; supporting open trade rather than self-sufficiency; and supporting moves towards competition and transparency.

The crisis was screaming out for action and, in many ways, the words of former Israeli PM David Ben-Gurion appeared to hold true, when he argued that solutions were easier sought and found to great rather than small crises. That is because the great steel crisis of 2001/2, was occupying the attention of just about every trade minister and government across the globe. The sea-change came on March 5 last year, when George W Bush announced a unilateral 30%, three-year safeguard duty on just about all steel entering into that country. His trade representative, Ambassador Robert Zoellick – who, only months earlier, had helped forge agreement at Doha, Qatar, for a fresh free-trade push within the World Trade Organisation – rationalised the US action by lamenting the bankruptcy of about 30% of the US steel industry by capacity. He added that losses were piling up for both the traditional integrated producers and the newer mini-mills, arguing, therefore, that US laws and the international trade rules had to be used to their fullest extent to help an American industry under stress – something that appeared all the more justifiable in the wake of 9/11.

The safeguard measures had a near instant impact, with hot-rolled coil prices rising 80% between January and September last year. Although these have since dropped back by about 20% on weaker demand and rising output domestically, the prices are still better than they were at the start of 2002.

Interestingly, some developing countries, South Africa being one, have also benefited somewhat from the US action as they have been allowed to continue exports to the US, at normal duty rates, as long as those exports remained below a specified threshold. Should this level be breached, however, the US has the right to review that access.

The Europeans and the Chinese were quick to respond with their own versions of safeguards, and the walls of protection that many stakeholders were trying to bring down, were, once again, built higher.

In addition, the Europeans and Japanese continued with supply-side measures to constrain growth through efforts towards consolidation. In Europe, this has resulted in price increases, but this trend is likely to taper off due to poor economic circumstances in that region.

In Asia, Chinese growth was the underpinner of the price recovery in 2002, and strong ongoing demand in the territory could well lead to continued, but less volatile, price rises this year.

Overall, the IISI believes world consumption of finished steel products increased by 4,2%, or 32-million tons, to 802-million tons in 2002, and it forecasts growth of 4,9%, or 39-million tons, to 841-million tons for this year.

However, this expansion is not spread evenly across the globe. Finished steel consumption in China alone was estimated to have increased by 14,8%, or 25-million tons to 195-million tons, in 2002 and that it could grow 10,3%, or 20-million tons, to 215-million tons in 2003. The IISI indicates that China has increased its share of global steel consumption from 13,5%, or 87-million tons in 1995 to a projected 25,6%, or 215-million tons, in 2003.

China is also projected to account for 45-million tons or nearly 64% of the two-year global increase of 71-million tons. Steel consumption growth in the rest of the world, excluding China, is estimated to be a far more modest 1,2%, or 7-million tons to 607-million tons in 2002 and then grow by 3,1%, or 19-million tons to 626-million tons in 2003. In fact, without China, the rest of the world is estimated to account for only 36%, or 26-million tons, of the 71-million tons of global steel consumption growth over the next two years.

What has to be recognised, however, is that while China is a net importer of steel at present, it also has a concerted drive to boost local capacity. In the longer term, therefore, China may end up producing more than it can consume, which could have an adverse effect on the global market.

For this reason, the IISI, at its meeting in Rome late last year, called for continued pressure to be placed on governments to halt artificial support for steel companies, especially when this support props up marginal firms.

It could be argued that the US safeguard measure is the most overt expression of this artificial support. However, the Americans are by no means the only culprits.

That is also why the current environment of stability, although false, could well be providing the necessary space for a renewed effort towards global steel-industry restructuring. For the first time in a long while, the rules, despite being unfair, are at least clear – a fact that is allowing the global industry to regroup and, in a few cases, restructure.

But there is little question the real battle – the one about bringing fundamental change to the steel-industry structure – is yet to come. The reason is simple enough: the fact remains that the international steel industry is still poorly structured, with massive overcapacity (estimated at well over 100-million tons) and many mills are only surviving as a result of politically-motivated actions to protect them.

The need for change was reinforced in December when senior government and industry officials from major steel-producing economies met in Paris under the stewardship of the Organisation for Economic Cooperation and Development (OECD). The gathering was designed to rekindle efforts aimed at reducing or eliminating trade-distorting subsidies. It was the fifth such meeting of the so-called OECD High Level Meeting on Steel and the third since the introduction of safeguard measures by the US earlier in the year.

The discussions highlighted the fact that the underlying situation in the world steel sector remained serious, noting that, despite some signs of improvement during 2002, the recovery remained fragile. Furthermore, the persistence of inefficient and excess capacity worldwide was contributing to volatility in steel trade.

For this reason representatives from Argentina, Australia, Austria, Belgium, Brazil, Bulgaria, Canada, China, Czech Republic, Denmark, Egypt, the European Commission, Finland, France, Germany, Greece, Hungary, India, Italy, Japan, Korea, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Romania, Russian Federation, Slovak Republic, Spain, Sweden, Switzerland, Chinese Taipei, Turkey, Ukraine, United Kingdom and the US decided to establish two organs, the Capacity Working Group (CWG) and the Disciplines Study Group (DSG), to look at facilitating plant closures and instituting better market disciplines respectively. Both should complete their work during the course of this year.

The CWG will not only assess the feasibility of helping to facilitate plant closures, but calculate the costs associated with permanent closures where these costs tend to impede such closures. It also has to examine mechanisms that could be used to provide incentives for plant owners to close inefficient facilities. Mechanisms to help assure that any financing is used in ways that are consistent with their intended purpose should also be explored.

Meanwhile, the DSG has to tackle the touchy subjects of subsidies and related government supports as well as trade remedies. It has to work out ways to reduce or eliminate trade-distorting subsidies in steel provided at all levels of government, taking into account existing multilateral agreements and mechanisms, as well as the needs of developing economies. The DSG held an initial meeting in February and plans to feed the outcomes of its work into the World Trade Organisation framework.

In addition, the peer-review pro-cess, established to probe inefficient capacity and related industry restructuring, would be strengthened, and would continue its work beyond 2003.

The main objective remains that of ensuring the closure of some 104-million tons of capacity between 1998 and 2005.

However, if history is anything to go by, there is no question that this process, particularly when it comes to implementation, is going to be fraught with difficulties and political road-blocks. To be sure, it is going to require extreme skill and patience if the industry is going to successfully negotiate this streamlined industry structure.
Edited by: Terence Creamer
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