Last week we wrote an article on the subject of steel imports and their effect on domestic mill utilization rates. The focus of the article had countered the industry’s assertion, quoted in a Purchasing.com article, that imports caused the US steel industry’s low capacity utilization rates. We contend that imports do not appear to have significantly changed as a percentage of US consumption, and in fact the low capacity utilization ties to poor demand.
USGS figures up to the end of 2008 suggest imports remain consistent with previous years as a percentage of overall consumption. In fact, they show they have been falling since 2006. US Census data also supports that proposition, however the industry has and continues to campaign vigorously against imports, particularly from China, thus diverting as much demand as possible to domestic mills. We argued in the article domestic production capacity cannot meet US demand under normal circumstances. Although this economic environment does not represent normal circumstances, we can’t turn imports on and off to suit domestic capacity utilization levels. When demand comes back, imports will need to play a part.
The industry’s usual mechanism for keeping out or restricting imports involves the imposition of countervailing duties on the basis of alleged dumping, defined by Wikipedia as the act of a manufacturer in one country exporting a product to another country at a price which is either below the price it charges in its home market or is below its costs of production. The importing country can take a range of steps to counter what it perceives to be dumping of goods in its home market. The most common action involves filing an anti-dumping and countervailing duty case.
We received some strong responses from one domestic producer, who seemed more concerned in subsequent discussion with our suggestion that the domestic industry should consider investing in additional production capacity.Ã‚Â We would agree with that point. The world has enough — if not too much — capacity and really doesn’t need anymore.
The domestic steel lobby has worked hard to build a case against Chinese producers on the grounds that by a number of measures, the Chinese producers and the export prices at which they sell receive subsidies or in some other way enter the US market artificially low. How much validity does this case have and what shall we conclude?
The first allegation involves currency manipulation. This results in cheap exports, cheaper than they ought to be. Of course for countries like China an artificially low currency also has the effect of raising imported raw material costs. China imports much of its iron ore, particularly during this year, as domestic mines have failed to compete with Australia, Brazil and India. In addition, some of the coking coal required for steel making and much of the oil used for power production comes from imports. Thermal coal for power production comes from the domestic market. Consequently, China suffers as well as benefits from keeping its currency low. On balance though, an artificially low currency creates greater benefit in that domestically supplied costs such as labor, capital costs, thermal coal and profit equate to less dollars than they would otherwise do. We have written recently on allegations that China has manipulated its currency and concluded that we feel it does. Should raising anti-dumping cases become the forum to redress the issue of currency manipulation? Surely this is an issue for the US government to be tackling the Chinese about directly? If China’s currency is artificially low it affects all of China’s exports, even more so for wholly domestically produced products where a larger percentage of the raw material costs come from the domestic market.
Another element of the anti-dumping plank involves the notion that steel producers in China obtain government subsidies. Studies suggest that the cost of capital in China is lower than in the west largely because savings rates are very high but investment opportunities remain very limited. Both interest on savings and the costs charged for loans remain low in comparison to other countries making borrowing for capital investment highly attractive. Does this represent a direct subsidy? One could argue it represents an indirect one, but China is not alone in subsidizing producers. Many countries, the US included, give all kinds of aid in the form of tax breaks and publicly funded health care and pension rights which reduces the burden on producers. We wrote back in February about subsidies to the US steel industry which suggested that China is not alone in taking handouts. Chinese steel firms have benefited from cheap land and a low cost of capital, leading directly to over-investment, even as the government has tried to dissuade excessive basic steel production by applying export taxes and encouraging consolidation.
We will take a look at some of the other aspects behind these anti-dumping cases tomorrow.