As part of the World Trade Organization, China is scheduled in December 2016 to achieve Market Economy Status, as opposed to its current Non-Market Economy status. This means, among other things, it will be much harder for US, Canadian or Mexican steel companies to bring anti-dumping actions against Chinese imports of steel and hundreds of other products. Some believe that status upgrade will be automatic, but not the NAFTA steel sector.

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“We don’t believe [Market Economy Status] happens automatically,” said Thomas J. Gibson, president and CEO of the American Iron & Steel Institute. “Under US law there are criteria, six, by which China’s status as a market economy should be judged. And we are just drawing the US government’s attention to that and asserting that China should not become a market economy. Our main focus was to impress upon our elected officials the urgency of the crisis. The focus was on the breadth of the problem.”

NAFTA United Against Chinese Market Economy Status

Gibson was speaking during a press conference and conference call that featured several North American steel industry executives speaking with one voice against China’s potential ascension to market economy status. It’s an issue that has united Canadian, US and Mexican steel producers and given the sometimes disparate North American Free Trade Agreement partners solidarity against what they see as a flood of particularly Chinese imports that has grown to 30% of the North America market for the first time ever.

Last week, AISI released a commissioned report concluding that treating China as a market economy in anti-dumping investigations would “severely damage the NAFTA steel industries and harm NAFTA economies.”

Six steel industry groups sponsored the report: AISI, the Steel Manufacturers Association, the Canadian Steel Producers Association, CANACERO (the Mexican Iron and Steel Producers’ Association), the Specialty Steel Industry of North America and the Committee on Pipe and Tube Imports.

Has the EU Already Decided for China?

Of course, the North American associations aren’t alone in this fight. European Union lawyers have already concluded that China should be formally designated a “market economy” at the end of next year. The EU would have been a powerful ally for North America.

The European Commission’s legal service circulated a confidential opinion within the institution this past summer, officials familiar with the opinion said. The confidential opinion is not binding, and the EU may still oppose China’s “graduation,” but it’s still a blow to the organizations proposing full review and not a standard graduation to market economy status for China.

The Problem With China: Overproduction

The main argument the US, Canadian and Mexican steel producers make would likely hold as much weight with the EU member nations as it does for NAFTA’s: That Beijing’s policies lead Chinese firms to pump out far more goods than China’s domestic market can consume. Or overseas markets, for that matter.

“There are almost 700 million metric tons of overcapacity globally,” said Nucor CEO John Ferriola in last week’s press conference. “That’s almost half China’s. We must allow basic market forces to influence China’s production.”

Ferriola said the case that he and his fellow steel executives made to their representatives in congress was that the ENFORCE Act, a bill stuck in congress after previous legislation was passed to address dumping, would do this. Ferriola called it a “major piece of unfinished business.”

ENFORCE would change customs enforcement and stop trans-shipments which the domestic producers say are being sent from China and other nations where their origins are concealed by relabeling and other shipping tricks. It also has a much more comprehensive definition of “material injury” than current anti-dumping laws.

The bigger issue, even if ENFORCE passes, however, would still be China achieving market economy status. The Canadian Steel Producers’ Association predicted that 400,000 to 600,000 NAFTA jobs will be lost if nothing is done about Chinese exports.

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“Our main focus was to impress upon our elected officials the urgency of the crisis. The focus was on the breadth of the problem,” Gibson said.

A report released recently concludes that treating China as a market economy in anti-dumping investigations would “severely damage the North American Free Trade Agreement (NAFTA) steel industries and harm NAFTA economies.”

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The study, composed of three economic analyses, was conducted by leading economists from Capital Trade Incorporated in Washington, DC;  the Centre for Spatial Economics in Ontario, Canada; and IMCO in Mexico City, Mexico.

Six steel industry groups — the American Iron and Steel Institute, the Steel Manufacturers Association, the Canadian Steel Producers Association, CANACERO, the Specialty Steel Industry of North America and the Committee on Pipe and Tube Imports — sponsored the report. They issued the following statement:

“China is a state-run economy and does not operate on market principles, yet it argues that it must be treated as a market economy as of the 15th anniversary of its accession to the WTO in December 2016. This third-party report found that granting China market economy status is premature and would lead to significant job losses in our sector, and in steel communities where plants are being idled and jobs are already being decimated. This is unacceptable.”

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Over the past 2 months, the decline in Chinese shares has stopped.

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After a huge fall during summer, China’s stock market is performing better and that is bringing some optimism back to the market. Perhaps, too much optimism?

Shanghai Composite Index year to date

Shanghai Composite Index this year to date. Source: MetalMiner analysis of data.

In a recent article in the Wall Street Journal titled “China enters a bull market” the newspaper calls this two-month rally a bull market. With all respects to the author, Cheng Dong, describing this bounce from its lowest level as a bull market only demonstrates a complete lack of understanding of what a bull market is. Indeed, the Shanghai Composite Index already rallied 24% in July only to fall again to new lows. Read more

The American Iron and Steel Institute, the Steel Manufacturers Association, the Canadian Steel Producers Association, CANACERO (the Mexican steel association), Alacero (the Latin American steel association), EUROFER (the European steel association,) Instituto AcoBrasil (the Brazil Steel Institute), the Specialty Steel Industry of North America and the Committee on Pipe and Tube Imports released a joint statement today about China’s attempt to gain market economy status in December 2016. They’re not big fans of it.

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It read:

“The global steel industry is currently suffering from a crisis of overcapacity and the Chinese steel industry is the predominant global contributor to this problem. Read more

This week the Federal Reserve declined to raise interest rates here in the US, but hinted strongly that it might do so at its last meeting of the year in December. Market-watching and significant commodities lows dominated the week in metals and most commodities.

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In China, the central government made a move to goose its planned economy that hardly anyone expected when it rescinded the longstanding 1 child policy families had been limited to since 1979. Chinese parents can now bring 2 whole kids into the world!

Introduced by Deng Xiaoping to improve a then-impoverished nation’s scarce resources, the baby limit is threatening to undermine growth there as the working-age population shrank last year for the first time in 2 decades and the cohort of senior citizens is projected to grow rapidly, just like our retiring baby boomers.

We write about China quite a bit here at MetalMiner, but mostly in relation to metals exports, oil and things that aren’t human beings. Yet, our skepticism about China really changing to modernize its economy extends to this 2-child policy, which could be a clever way to make it look like the nation is changing without dealing with underlying problems.

US dollar vs. RMB

Dollars and yuan renminbi dominated our economic conversation this week.

With slowing growth and a steel industry that’s still stuck in the dark ages when it comes to supply and demand and environmental regulation, can China really have all the jobs necessary to fill its current population? Let alone the next generation? China’s planned economy shoots for 100% employment. I’m skeptical of China getting even close to that these days without currency manipulation, overproduction of steel, aluminum and most of the metals that we track.

So, the labor market there is not really a market at all. My colleague, Lisa Reisman explained just how far mainland China is from being a market-based economy this week while discussing recent World Trade Organization moves to recognize it as such. The picture’s not pretty.

China’s largest listed steel producer, Baoshan Iron & Steel, has no further plans to cut production following the recent closure of its 550,000-metric-ton-per-year Baotong plant, even though most figures show it is still overproducing steel for export. I suppose we could achieve 100% employment in the US here, too, if we were to give half the unemployed jobs digging holes and the other half jobs filling them up.

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As if on cue, the US Dollar bounced off support and is now climbing higher against other currencies. While our banking system, and the Fed itself, can sometimes seem arbitrary and unsatisfying to investors, things could be far worse.

Arguably, no issue has impacted the steel industry more than imports.

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With multiple trade cases filed in 2015, service centers reeling with higher than average months-on-hand inventory levels (at prices that exceed the current market), US producers operating at 71.3% capacity utilization, the last thing the industry needs to hear is China somehow ascending to the World Trade Organization with full “market economy” status.

Nobody Thinks China Operates a Market Economy

According to a new report issued by trade specialist law firm Wiley Rein entitled, The Treatment of China as a Non-Market Economy Country After 2016 discusses what changes in market status China should expect to receive after 1 provision in the original negotiated WTO agreement expires on December 11, 2016.

China’s Protocol of Accession (to the WTO as a full member) requires that China and more specifically, its government, not meddle, “…its control over prices of key inputs to many manufactured products.”

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Chinese Annual GDP Growth

Source: Bureau of Statistics of China

China’s economy grew an annual 6.9% in Q3 this year, barely beating views but down from 7% expansion in the previous quarter. This quarter was the slowest growth since Q1 of 2009.

The head of the Aluminum Association, a US-based trade association made up of North American producers, will meet face-to-face with her Chinese counterparts next week for the first time since the group asked the US International Trade Commission and US Trade Representative to probe mislabeling of China’s exports, as a trade dispute between the nations escalates.

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Heidi Brock, the US industry body’s president, will meet with representatives of the China Nonferrous Metals Industry Association at their invitation at an event next week in Qingdao, China, she told reporters at the association’s annual meeting in Nashville, Tenn.


China’s export of so-called “fake semis” has grown dramatically in recent years, angering producers elsewhere who argue that the metal is exported as semi-fabricated to avoid an export tax on primary aluminum, but is intended to be re-melted into primary by the consumer. Brock said imports of semi-finished products have grown 115% between 2012 and 2014.

Imports of Chinese semi-finished aluminum

Imports of Chinese semi-finished aluminum products.

“The Chinese market is a very serious issue and we plan to deal with it with partner associations,” Brock told reporters from the conference. “Imports have increased 63% this year alone. (Chinese producers’) product is the most carbon-intensive in the entire world. Energy subsidies and, potentially, illegal activity are perpetuating the existence and expansion of the high-carbon industry there.”

Climate Implications

Brock also said she hopes the aluminum trade dispute is among the topics discussed between the US and Chinese governments at the United Nations Climate Change conference and US-China Joint Commission on Commerce and Trade later this year.

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She did not give a timeline on when the ITC might respond to the association’s request for an investigation.

China’s excess aluminum capacity and low global prices are having an impact even among state-owned aluminum producers, it would seem.

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A Reuters article this week reports that Aluminum Corporation of China (Chinalco) plans to shut down it’s Liancheng smelter with a capacity of 550,000 metric tons. The plant in the northwestern province of Gansu has been losing money since at least 2011, racking up losses of $313 million making it Chinalco’s worst-performing smelter.

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Officially, the Chinese economy grew faster than expected in the third quarter, according to China’s statistics bureau who said GDP rose 6.9% in the third quarter in inflation-adjusted terms, down from 7% in the first 2 quarters and 7.3% for full-year 2014.

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But, Beijing’s growth figures have been the subject of considerable conjecture for years and the current gradual slowdown official figures report seem at odds with the low Purchasing Managers Index numbers reported this year.

Source: Telegraph Newspaper

Source: London Telegraph

True to say, in the detail there is strong evidence of a 2-speed economy, officially industrial output in September grew at just 5.7%, the slowest pace since 2008, while Property investment slipped to 2.6% in the first 9 months, the lowest growth since 2009. Read more