The problem of overcapacity has dogged the steel industry for years © FT montage; Reuters
The steel industry has a serious problem with size: it needs to slim down.
Around the world, a surplus of factories pose a threat to the sector’s health, according to industry executives. Even a recent rally in steel prices, efforts by China to shrink its extensive industry and moves to deter imports in many regions have failed to assuage concerns.
“Our current [global] overcapacity issue is bad,” said John Ferriola, chief executive of US group Nucor, speaking at the World Steel Association’s annual general meeting in Brussels earlier this month. “[It] results in a high level of exports that in some cases are illegally subsidised and dumped in other nations.”
The problem of overcapacity has dogged the industry for years. When mills are underused, they use raw materials less efficiently and producers are forced to reduce prices in the scramble to win orders and cover their high fixed operating costs.
But there is a new political urgency, with accusations of unfair trading practices that have caused protectionist measures in number of countries.
A steep rise in exports, especially from China, contributed to a collapse in the price of steel two years ago. That hit earnings hard at companies such as ArcelorMittal, South Korea’s Posco and US Steel, triggering major job losses and raising questions about the industry’s future in some developed countries.
Authorities in the US and EU responded by slapping tariffs on categories of steel deemed to be subsidised or dumped — sold below the cost of production or home market prices — from a range of countries.
US president Donald Trump has also ordered a “Section 232” investigation into whether steel imports threaten national security. A report expected to lay the groundwork for steep tariffs was due over the summer but has been delayed.
Market conditions have since improved and profits are recovering, but executives at leading steelmakers remain worried about overcapacity.
“Dumping is the single most immediate threat for the whole of the European steel industry,” said Geert van Poelvoorde, president of European lobby group Eurofer and an executive at ArcelorMittal. “Excess steel capacity in a truly global market helps no one in the long term.”
China, which accounts for half the world’s steel output, is singled out for criticism. Western companies and governments allege that it illegally subsidises lossmaking mills that offload any excess production overseas at low prices.
As the pace of China’s economic growth cooled, its steel mills, many of which are backed by the state, used exports as a pressure valve. Its overseas shipments more than doubled between 2008 and 2015 to 112m tonnes, more than the total consumed in the US, although the level is now falling.
While about 1.67bn tonnes of steel were made worldwide last year, there was installed capacity to make a further 737m tonnes, according to estimates by the OECD.
But the OECD said global oversupply could drop below 700m tonnes this year due to increasing demand, and Beijing said it is more than two-thirds of the way towards a target of permanently shutting plants capable of producing 150m tonnes of steel a year.
China has also pushed for consolidation to weed out smaller and less competitive mills. The merger of Baosteel and Wuhan Iron and Steel last year, for example, created the second-largest steelmaker by tonnage behind only ArcelorMittal.
But though China’s steel exports have fallen, there are calls for it to go further.
Mr van Poelvoorde said that although supply has decreased “slightly”, there is “still a long way to go”.
“More than half [total overcapacity] is in China, so it is the first area where the problem should be tackled,” he pointed out.
In response to the argument that overcapacity is not just limited to China, executives of some North American and European steel producers say their regions would have no need to make cuts if imports fell to historic average levels.
There are also fears that supply cuts from China could be cancelled out by rising production elsewhere.
India’s government has set its sights on more than doubling production capacity to 300m tonnes a year by 2030. Iran meanwhile aspires to export 20m-25m tonnes by the middle of the next decade, as sanctions lift.
“If you compare the estimated demand for finished steel products in 2035 with existing installed capacity, then we can very safely say there is already today enough capacity installed globally to satisfy demand for the next 20 years,” said Edwin Basson, director-general of the World Steel Association.
“It makes sense not to focus on building too much new capacity.”
However, TV Narendran, a managing director at Tata Steel, was sanguine about India’s plans because of its need for new infrastructure.
“Unlike the case in China, where steel capacity is built very fast, I think in India it will take much longer and I don’t believe end-demand will outpace capacity growth over the medium to long-term,” he said.
Local Chinese leaders promise to make cuts
Local Chinese leaders have historically resisted big cuts to steel and coal production because of the potential hit to jobs and economic growth, writes Emily Feng.
Yet at the Communist party’s five-yearly congress this month, party leaders from key industrial areas were quick to show their commitment to reducing capacity.
“We have fulfilled our responsibilities. We have reduced our work force and shed extra capacity all while maintaining our social and economic stability,” said Jiao Yanlong, party secretary for the city of Tangshan, home to Hebei Iron and Steel, the world’s third-largest steel producer by output.
Tangshan is one of 28 cities that says it is cutting production by up to 50 per cent this winter to reduce pollution. It has also extended orders to halve production more than three months beyond the original January end date, as China embarks on major industry reforms.
“Whatever you want us to adjust, we will adjust. Whatever you want us to do, we will do. We will listen to whatever the central authorities order,” said Wang Xiaodong, party secretary of Langfang city, another steel town.
The bosses of China’s big state-owned industrial enterprises also acknowledged their responsibility to slim the industry.
“There were many problems [in the steel and coal sectors] that should have been solved a long time ago,” said Yang Zhaogan, chairman and party secretary for Shaanxi Coal and Chemical Company Industry Group. “Cutting overcapacity . . . has brought us to a new beginning.”
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