Last Wednesday, the US ITC (International Trade Commission) in a 6-0 vote, ruled against Chinese OCTG producers and exporters slapping a 10.5% – 16% countervailing duty on this category of imports starting mid-month. On April 1, the anti-dumping portion of the case will also come up for a vote. Preliminary duties of 96% have already gone into effect. Whether the economy or the trade case has caused the steep drop in OCTG imports, we don’t know but check out this link from Panjiva to see the steep drop in OCTG imports.
The case has created strong opinions (arguments?) both pro and con. Here is a quote from a recent Washington Post article, suggesting that China, “asserted that the global economic slowdown was the real reason for lower demand for U.S.-made steel pipe. Personally, I think that argument is hogwash. Though the end result of this case will be an increase in price for US buyers, the reality is that China has a distorted export tax and VAT scheme which incents Chinese producers to over-produce these products and export them to the US. The second factor leading to the flood of imports involves an undervalued RMB. Both create the net effect of making Chinese goods much cheaper then they would have otherwise been. We have written about both of these points previously here and here, among many other posts.
Many will claim this case as an example of protectionist US trade policies. And ordinarily, we might concur but the facts of this case suggest the ITC made a good decision. Let’s look at this a bit differently shall we?
As a buying organization, we all want to see maximum price competition and therefore would advocate policies that support imports. But if the US allows a flood of OCTG imports (which it didÂ¦the case at $2.8b represents the largest trade case ever and the trade case documentation along with Panjiva data all show massive imports of OCTG), the downward price pressure could force domestic producers to shut down lines (we should add that OCTG has a lengthy supply chain including iron ore and coking coal producers to flat rolled steel producers who produce for this end application) and in some cases, shut down those lines permanently which would ultimately result in higher prices for domestic manufacturers. A buying industry such as oil and gas always has an interest in trying to preserve as many supply options as possible, despite aggregating company specific demand with fewer suppliers to achieve price leverage.
Let’s borrow an example from the world of rare earth metals. Once upon a time, the US produced neodymium and had a supply chain that could process, refine and make neodymium into magnets. But that part of the market went by way of China as they (the Chinese) undercut US producers and flooded the market with their magnets. The domestic neodymium industry also lacked the powerhouse lobbying organizations of the domestic steel industry. Today, to my knowledge, only 1-2 neodymium players exist in the US. Buying organizations around the country all rely on Chinese producers. It would be a tragedy for the US oil and gas industry to have to depend upon China OCTG because we killed our own domestic industry.
Does this case represent a good decision on the part of the ITC? I don’t buy the steel industry’s arguments in every case but I do on this one. Buying organizations what do you think?