Should the US Government Allow a Chinese Steel Mill to Invest in Steel Technology They Don't Have?

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For those of you in the steel industry (or who watch the steel industry closely), a story has been brewing for a couple of months that we believe will have far-reaching implications for America’s steel industry.  According to earlier press announcements, Anshan Iron & Steel Group, China’s fourth largest steel producer, has made a 15-20% investment in Steel Development Corp to build a rebar plant in Armory, Mississippi. Steel Development Corp is a private company backed by private equity will open a 300,000 ton steel rebar facility this year. The company has a world-class management team headed by former Nucor CEO John Correnti. And this is partially what makes this investment by Anshan so intriguing. [Ed. Note According to a May 24 AMM post, the investment will also go toward building four re-bar plants (not one) and one flat rolled product mini-mill, all based in the US)

The plant will sell its products through Japanese trading firm Marubeni as well as Anshan throughout the southeastern United States, according to a Bloomberg report. You’d think that this might be the end of the story, but it’s not. Dive under the surface a bit, and the investment by Anshan raises serious concerns not only among steel producers but also for any US manufacturing organization in general. The Chinese investment has also reached the highest levels of the US government, going all the way to US Treasury Secretary Tim Geithner. Why, you may ask? Because the US Congressional Steel Caucus has asked the Treasury Secretary to block the investment on economic and national security grounds. The concern, according to one news report, “The bipartisan group [Ed. Note: The Congressional Steel Caucus] said they were worried Anshan could gain Ëœaccess to new steel production technologies and information regarding American national security infrastructure projects’ through the investment.

Steel Development Corp defended its position, stating that the total investment by Anshan was less than 20% and, “With Steel Development projecting production of 350,000 tons of rebar per year in a 120-million-ton steel market”less than three tenths of 1%”the promotion of national-security fears due to the Anshan investment is, at best, difficult to rationalize,” one Steel Development spokesperson said.

But is it so difficult to rationalize? We can’t speculate on “national security concerns, as we have not researched what the criteria are for something to be elevated to that status. But from an economic perspective, we’d like to share the following facts that have been largely absent from all press accounts (particularly this very sarcastic Forbes piece from yesterday, mocking the Congressional Steel Caucus) Here are some facts that have not been associated with this story until now:

  • Currently, China does not operate EAF mills. It relies nearly 100% on BOF production methods the question of technology transfer ought to be considered heavily
  • Let’s re-examine the above-mentioned rebuttal comments from Steel Development Corp regarding the impact of this project at “less than three tenths of 1%. First, the last time the US steel market was at 120m tons of consumption was in 2006. The 2009 estimated steel consumption was 59m tons, data courtesy of the USGS. Prior to 2006, the only other year in which apparent steel consumption met or exceeded 120m tons was in 2005. The rest of this past decade, steel consumption hovered in the lower 100m ton range (e.g. less than 110m tons)
  • Let’s examine rebar consumption. First, we’ll examine apparent consumption (apparent consumption is net domestic consumption plus imports) and then we’ll calculate capacity utilization:
    • 2007 9.824m short tons
    • 2008 8.374 m short tons
    • 2009 5.359 m short tons
    • 2010 based on current 2010 run rates, the industry will ship 5.1m short tons

    If you compare the peak of the market (2007) with today, the US rebar industry operates at a 62% capacity utilization rate; the overall steel industry operates at a 72.9% capacity utilization rate as of June 26, 2010.

  • Two rebar facilities are currently shut down, one in New Jersey and one in Oklahoma. Many of the other facilities that run both mixed merchant/rebar mills are also running at less than capacity
  • If we were to develop a map of the United States and mark US rebar plant locations by geography (assuming each mill can ship up to a 300 mile radius), we’d see a glut of capacity in the US Southeast. The only argument one could make for building a rebar mill may be to move it somewhere out West, but even that may be a tenuous argument
  • It is a widely held belief within the steel industry that 100m tons of domestic production represents full employment. Take a look at this link to see what the World Steel Association projects for US steel use (consumption):
    • 2010 72.7 m tons
    • 2011 78.1 m tons
  • And we all know that US construction markets (the biggest application for rebar products) remain in troubled waters. Take a look at annual expenditures for both commercial and residential construction here. Incidentally, 2010 data is tracking 8% below 2009 numbers. In other words, rebar capacity utilization rates are even less than overall steel industry capacity utilization rates

So what can we conclude? We can’t see the business case to add rebar capacity in the US. Clearly the PE firm involved in Steel Development Corp is banking on the management team. At the very least, we don’t see the value in allowing a state-owned Chinese company to have access to the intellectual property and technology that will go into this facility. If our politicians think this is about jobs, we can assure them that this may be a short term win (in terms of new jobs in Mississippi) but they will result in a net loss for US manufacturing, as the current US domestic rebar industry has already laid off thousands of workers. And by giving this technology to the Chinese, well, we know what that will mean long term¦.

–Lisa Reisman

Comments (10)

  1. industryperspective says:

    very interesting article. Some other thoughts to consider

    1) in the 1960s the US was entirely BOF production; it also was at full capacity and this did not stop pioneers like Nucor from introducing EAF production to under cut the cost of merchant products and shutdown capacity of the big integrated steel producers

    2) In the free market anyone and anytime can invest in new technology to be the lowest cost producer. If SDCO can shave 20-60US/ton off the cost of rebar and shutdown more higher cost operations that is survival of the fittest. If they fail, then the free market of capitalism proves itself again

    3) SDCO does not even own the technology in question. It is not EAF technology but rather the continuous-continuous rebar mill patented by Daneili of Europe. There is not one rolling mill supplier left in north america. Danieli has built this prototype mill (see CMC arizona) and has had issues with the Chinese steeling their technology for years. They may not even take an order knowing its purpose is to take their technology back to China with or without their permission.

    4) Due to trade issues Anshan appears to be following the pattern of Toyota to invest in the markets they sell to. This worked for
    Toyota to breakdown some of the free market barriers to their imports. Why wouldn’t they want to invest in the best technology when doing so?

    1. admin says:

      Industryperspective – thanks for your thoughtful comments. Just a few follow-up points….

      First, I always believe competition is a good thing – we need innovation for sure the question is, does Anshan Steel bring innovation to the table? Are there not other folks in the financial world willing to make such an investment? If not, why not?

      Second, if SDCO can shave $20-60/ton off the cost of rebar, go for it. Truthfully, the freight due to location vis-a-vis scrap and customers will probably outweigh the technological advancement, but heck prove me wrong. The question I have for you is this, does China practice free market capitalism? Your retort might be “no but neither do we”, though I’d argue we play a lot more fair than the Chinese. Do we need to invite them to come learn all our mini-mill ways on US soil? Must we be the training ground?

      I think your third point supports the argument – why take money from Anshan?

      And to your last point I think the comparison between Anshan and the Japanese steel mills would make for a better basis of comparison. The reality is that the Japanese mills came here because they needed to fill a market need for very high quality steel for huge OEM’s like Toyota and Honda. What company in the US “needs” the steel that Anshan provides? I’m not suggesting that they don’t produce high quality materials but what is the Chinese OEM situation here in the States such that they need this material from Anshan? I think the analogy of China/Japan is a weak one. Of course Anshan would “want” to invest in SDCO. The question I raise, is should our government allow them to do so?

      Next thing – I’m going to be called a protectionist. Call me what you will, I believe in free trade that is fair trade. China does not engage in fair trade. What I really am is a realist and what is happening in the US is a quiet sucking sound of jobs and manufacturing to China. And like Andy Groves of Intel recently said, if we think we’re all going to survive by being knowledge workers, then I think we have some re-thinking to do as a society. LAR

  2. Lou Bromley says:

    Why not? We already have
    Severstahl from Russia
    Thyssen Krupp from Germany
    Tianjin Pipe building in Germany
    Geedau Amerstahl from Brazil
    Arcelor Mittal from India
    Most of the recent EAF shops have been contracted with foreign builders. China has been building EAF’s since the late 50’s and has foreign technology partnerships.
    Our experets in Washington should be concentrating current problems they have caused.
    Sincerely,

    Lou Bromley

  3. Samuel E.Shaver says:

    I am a retired general foreman from U.S. Steel.To allow this rebar mill to be built by or for a chinese company would be like putting the fox in the hen house.Symplistic thought but beware! Sincerely Samuel E. shaver Oakhurst Ca.

  4. admin says:

    One more additional point I neglected to make on this story, Anshan is a state owned company (like I mentioned, unlike those other foreign companies like Thyssen that have invested in the US). Anshan, being state-owned benefits from all sorts of market distorting subsidies and trade practices sanctioned by the Chinese government.

    If we are to engage in “fair” trade, then shouldn’t the Chinese allow US companies to take controlling stakes in state owned steel companies? Seems fair to me…LAR

  5. steelwill says:

    Do you think the Chinese should allow US companies to take controlling stakes in state owned steel companies like they do for non-US companies?

  6. Sridhar says:

    The statement that China does not operate EAF mills is wrong. China operates several EAF facilities.

  7. admin says:

    Fair enough, let me re-phrase…total steel production in China coming from EAF mills is less than 5%. LAR

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