Can Trump curb China’s steel industry?
The Trump administration’s pledge to put America First by slapping border taxes on cars, steel and other imports comes as one of the greatest trade offenders is reiterating promises to curb its mercantilist enthusiasm.
China is saying it eliminated 45 million metric tons of steelmaking capacity last year as part of its plan to trim 100 million to 150 million metric tons by 2020.
The United States, European Union and others have been after China to curb steel production, blaming the country for about 425 million of the 700 million metric ton global glut of excess capacity.
Taking 45 million metric tons off the market sounds like a big deal. In the U.S., it would be the equivalent of cutting production by more than half.
In China, it is a drop in the bucket. Since the turn of the century, China has built mills capable of producing hundreds of millions of metric tons of steel. Independent metals analyst Charles Bradford estimates China produced about 808 million metric tons last year, up from 804 million in 2015.
“Everybody I know of, including me, expected a decrease in 2016,” said Mr. Bradford, citing promises China made.
China’s ability to produce more despite eliminating 45 million metric tons of capacity is one reason many take a skeptical view of the country’s promises.
“Announcing they are going to close it and actually doing it are two different things,” said John Anton, director of steel services for IHS Global Insight, an economics research firm. “I’ll believe it when it shuts down and it stays shut down.”
Mr. Anton speaks from experience. He based his 2015 forecast on China’s promises to cut capacity, which he says the country did — until the going got tough.
“As soon as people lost their jobs, they backed off of it,” he said.
He thinks the problem is Chinese banks that finance moneylosing mills at the government’s insistence. Banks want to keep the mills open because they know that if the plants close, they will never get repaid, Mr. Anton said. The fact that the mills are relatively modern and efficient makes them even harder to shut down, he adds.
“Every time there’s a price increase, there’s going to be an incentive to restart that mill,” he said.
Sooner or later, Mr. Anton expects banks will have to stop providing credit. In the meantime,
“Mills can remain zombies for a long time,” he said.
Mr. Bradford believes China plays with economic data more than most countries, especially when it comes to how much steel it can produce. China puts that number at 1.2 billion metric tons, but Mr. Bradford thinks at least 100 million of that doesn’t actually exist.
“Nobody really knows what the capacity is in China ... We get all kinds of funny numbers,” he said.
By overestimating how much steel it can produce, China can eliminate capacity that doesn’t really exist, Mr. Bradford said.
Gripes from American and European steel producers overwhelmed by cheap Chinese imports have prompted those governments to lodge trade complaints. The tariffs subsequently imposed are taking their toll.
Through November, U.S. imports of finished steel from China are down at an annualized rate of 63 percent, according to the American Iron and Steel Institute, which represents North American producers. The U.S. imported 2.4 million tons of Chinese finished steel in 2015 vs. 871,000 tons through November, the industry group reported.
In a statement, the institute said it is difficult to determine whether the capacity cuts that China says it has made take into account new capacity brought on line, especially previously idled capacity that wasn’t torn down. The steel institute is worried that even if China keeps its word, there will still be 50 million to 150 million metric tons of excess Chinese steel available for exports in 2020.
To date, China hasn’t been persuaded to meaningfully downsize its steel industry.
The ever-blustering Mr. Trump is promising to take China to task. Tearing down the wall of Chinese resistance, without sparking a trade war or worse, will require more than a nocturnal Twitter offensive.
It will require a well-conceived strategy and deft execution, not firing from the lip. The reality of how hard it will be to Make America Great Again — who decided it isn’t great in the first place? — is about to sink in.