Is Chinese Steel Helping Sound the Death Knell of UK Steel Production?

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Cold-rolled steel

Honestly, what is the answer to the problem of China’s steel exports destroying domestic producers around the world?

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It is no exaggeration to say the United Kingdown faces the end of its domestic steel industry. Last week, Tata Steel announced the elimination of 1,050 redundancies mainly at its giant Port Talbot plant in South Wales, adding to the more than 2,000 positions the company cut last year.

Can the UK steel industry survive? Source: Adobe Stock/Inzyx.

Can the UK steel industry survive? Source: Adobe Stock/Inzyx.

In October, SSI shut its steel plant in Redcar Teeside with 2,200 staff being made redundant, shortly after the announcement that 400 jobs were lost with the implosion of Caparo in the Midlands, the London Telegraph reported earlier.

What’s at Stake

Port Talbot is Britain’s last integrated steel works, at two-and-a-half miles long and 100 years-old it is also one of Europe’s most productive, churning out 3.5 million metric tons a year of top-quality flat-rolled steel. It has, in recent years, broken every target the company has set for efficiency, production and tonnage, yet when faced with Chinese imports priced at $34 per mt below the cost of production, according to trade body UK Steel, it is at risk of closure. Tata is losing $1 million a week and the Indian owners have been forced to write down the value of their UK steel investments by over $1.2 billion last year.

Nor is the UK alone, blaming record steel imports from China, ArcelorMittal has shut its 2.5 million mt per year electric arc furnace and associated rolling facilities at Sestao near Bilbao in northern Spain in the face of intense competition, high costs imposed by the EU and low prices.

Europe suffers from some of the highest power and environmental costs in the world as politicians try to outdo each other with their green credentials. Hans Jürgen Kerkhoff, president of WV Stahl, put an $11 billion (€10 billion) price tag on the expected European Emissions Trading System, under which companies will have to pay a tariff relating to how much pollution they produce. Penalties the Chinese, who are exporting almost as much steel as the whole of the EU produces, largely avoid.

US Market

Even in the US — which has been much more dynamic in applying anti-dumping tariffs and encouraging corporations, or at least government projects, to buy American — the domestic steel industry is still struggling. The Financial Times reported U.S. Steel’s results this week and they’re not pretty. Nearly a $1 billion net loss, which even allowing for a $600 million income tax provision, means the firm made a pre-tax loss of nearly $400 million for the fourth quarter in the face of low prices, appalling capacity utilization and the strong dollar.

According to Reuters, as global steel production contracted last year, spare capacity utilization expanded, with mills utilizing just 69.7% of capacity on average versus 73.4% in 2014.

China and the Capacity Conundrum

China’s steel sector is said to have spare capacity of 300-400 million metric tons, roughly half of global spare capacity of about 700 mmt, the paper reports. With domestic steel demand shrinking, China exported a record 112.4 mmt of steel last year, forcing other mills to cut output as they struggled to compete. Steel output in the European Union fell 1.8% to 166.2 mmt last year, while output in North America was 110.7 mt, down 8.6%. Nor is it getting any brighter. The decline in global steel output accelerated toward the end of 2015, falling 5.7% in December to 126.7 mmt. To be fair, even China’s output dropped by 5.2% to 64.4 mmt, still way beyond their needs, but a step in the right direction.

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Whether European politicians have a stomach for a fight with China over steel imports remains to be seen, but the industry firmly believes that without support from Brussels, steel production in many European countries may be a thing of the past a few years from now.

Comment (1)

  1. Overcapacity is not new in China.

    What exactly does a top-down, State-run economy do when its local bureau wraps itself around their local mill by thumbing their nose at central control? What is China Steel’s real utilization rate? The reported one? Or, where do the laid-off workers go and who supports them? Is there a proportioned relief in local taxes matching declining employment? Good luck managing that one. Therefore, dumping is their most practical tactic by letting those greedy Westerners suffer.

    As you suggest, the operant question: Whither the Western Response? Is there one? Or do we also put boxes around tariffs to avoid any harmful feelings from the Chinese efforts to protect their workers at our expense?

    IMHO any western response is doubtful, just ask your local Green representative.

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