Last Tuesday the Wall Street Journal ran an op-ed piece entitled: The More Expensive Steel Caucus which essentially accused the Congressional Steel Caucus (a bipartisan group of Representatives dedicated to the promotion of the “health and stability of the domestic steel industry according to Wikipedia) of protectionism over its “concern about an investment by No. 4 state-owned China steel producer, Anshan Steel in a new steel start up firm, SDCO, Steel Development Corporation led by former Nucor CEO John Correnti. We raised several arguments against this investment in an earlier more “politically correct” titled post: Should the US Government Allow a Chinese Steel Mill to Invest in Steel Development Corp?
Today, we will examine a few additional arguments as well as some comments we posted in response to this op-ed in the comment section of the Wall Street Journal. To sum up our earlier arguments, we can characterize them as follows: a) the domestic re-bar industry operates at much less than full employment (we estimate capacity at 62%), b) China operates largely with BOF production methods. Must it be our duty to teach the Chinese our technologies and perhaps more important, our production processes? c) We have far too much re-bar technology situated in the precise strategic locations SDCO wants to set up its operations d) key end markets for re-bar products (e.g. infrastructure and commercial construction) remain severely depressed. At the time, we suggested this investment appeared foolish on behalf of our own government to approve based upon an economic rationale.
And in hindsight, we still stand behind those arguments. On economic grounds, this investment makes no sense. But let’s put this argument front and center against everyone that believes this is “protectionist steel lobby whining:
- This investment is bad for US re-bar buying organizations sure short term buyers may enjoy the fact that it appears a new supplier would aid competition, heck SDCO may even drop its prices below the domestic industry to attract new customers. Reverse-auction anyone? But long term, is this good from a supply risk standpoint? We’d argue -hardly not. Adding new capacity in a market operating well below historical norms will make the whole industry weaker and ultimately drive additional [and permanent] plant closures. In short, it might seem like a long-term win but it’s a long term lossÂ¦.
- The national security argument as one of the commentators in the WSJ made to us specifically, “Jason, [Editor’s Note: writing to Jason Busch, editor of SpendMatters] the electric arc furnace is as common as dirt. Get real…..or get a hobby. The national security argument comes in the form of “electric arc furnace making is not really such a big technological innovation anymore, in other words, it’s not strategic and certainly isn’t of national importance! Are we really saying we don’t care what happens to the domestic steel industry of which close to 60% relies on EAF technology? Let me go one step further on this national security argument. People say “what’s the big deal about re-bar – how strategic is that? Well, rebar goes into a lot of building structures that we wouldn’t necessarily want the Chinese to know that we are building. But if Anshan invests in SDCO, they will have complete visibility into US government contracts, RFP’s and other investment and related project work that when we stop to think about, we probably don’t want them knowing.
- What is the buy out clause in the deal? Does Anshan have the ability to buy a majority ownership stake in SDCO over the longer term? This would effectively mean the Chinese government can set up shop on our shores and undercut our own market or do whatever it wants. Is that something we want to allow?
- Finally, and most of our readers might not know this “Anshan is 67% owned by SASAC, (China’s Assets Supervision Commission of the State Council) which doesn’t necessarily make it a tool of the Communist Party–until you take a closer look. The senior management of SASAC-owned companies, including Anshan, are appointed, not by their Boards of Directors, not by SASAC, not by the State Council, but by the Politburo of the Chinese Communist Party, according to this article from Forbes.
Now if that last argument doesn’t bother you enough, here is one more. We find it ironic that a Chinese state owned entity can enter and make investments in US companies but a US steel firm can’t do the same in China. I love double standards.
Well, at least we can be sure of one thing. If the US Congressional Steel Caucus fails to stop this deal from going through, we can all breathe at least one sigh of relief knowing that once the Chinese are on our soil they’ll have to deal with our legal system. Now that is one unique American innovation that we’d welcome the Chinese to steal (pun intended).