This is the second post of a two part series. You can read the first post here.
Perversely one significant difference between the UK and the US is that the UK is surprisingly still a net exporter of steel. According to the UK based Iron and Steel Statistics Bureau – ISSB the apparent consumption in the UK will be 7.9 million metric tons in 2010 although production will reach 9.3 million metric tons. The country imports about 3.7 million metric tons but exports 5.3 million metric tons. Part of the reason that UK steel production did not drop in percentage terms as much as some other countries after the financial crisis, is because imports took the hit dropping 46% while exports dropped only 30% and consumption 39%.
Although China in particular and Asia in general, is often cited as the major cause of steel trade imbalances (and of a host of other trade issues we haven’t time for here) according to the ISSB, the former Soviet states of Russia, Ukraine and Kazakhstan collectively import 3 million metric tons, internally trade just 8 million metric tons but export a whopping 49 million metric tons. What comparative advantages are these states employing? Well, I can throw in a few – low capital cost of equipment the steel mills were inherited at low cost from the Soviet state, cheap power, low labor costs, in most cases low raw material costs and low environmental costs. In some parts of the world such as Europe these East European mills are major sources of imports and represent a considerable threat to domestic producers but so far have not figured significantly into the US with the exception of slab for Russian owned US rolling plants.
Although China is positioned below South Korea, Japan and Germany on the latest Steel Monitor Import survey, (and of course well below Canada and Mexico) that is in part due to previous trade disputes. If it were not for these Chinese imports would undoubtedly feature more prominently on the list, not necessarily because Chinese mills enjoy a comparative advantage in the Adam Smith sense, indeed the efficiency of many medium to smaller mills would compare badly with those in Europe or the US but rather because of the distortions to the free trade model we touched on above. In spite of variable efficiency and quite appalling environmental damage, Chinese steel mills have continued to expand beyond even domestic demand. The fear is that China will go too far, that rapid investment in steel production will overshoot a gradual cooling of domestic demand resulting in massive over supply and a flood of exports onto the world market.
So back to our opening section, should industrialists be worried that steel production is shrinking in countries like the UK and the US, and to varying degrees imports have become a long-term feature of the supply landscape? We have not made the case for domestic employment or environmental responsibility or any one of a number of other perfectly valid arguments in favor of domestic steel production. In our opinion one of the most basic issues is that we don’t live in a fair and open free trade world as envisaged by Adams, Ricardo, etc, we live in a trading environment heavily distorted by national interests and state manipulation. As a result, we need to encourage domestic producers across the whole range of goods and materials providing they can operate without direct state subsidy. To become totally or even majorly dependent on imports leaves our whole economy exposed to supply and cost volatility. Yes metals are commodities and as such we all face volatility but this is exacerbated many times over when an economy becomes wholly or unduly reliant on imported supplies.