G20 Tackle Chinese Steel Overcapacity; EU Plays Good Cop to US Bad Cop

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Will Europe’s more collaborative approach to stemming China’s steel exports to the region have more success than the U.S.’s downright combative use of anti-dumping legislation?

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Both Europe and China are trying to portray this summer’s moves — to form a joint team to monitor bilateral steel trade data and to supervise China’s moves to address overcapacity — positively as the European Union engages China in a constructive dialogue rather than publicly berate the People’s Republic.

Steel mills creating Chinese steel overcapacity

No matter where China closes mills, there will be pain for those displaced as overcapacity is finally dealt with. But is any pace, at this point, fast enough? Or are import barriers the only remedy? Source: Adobe Stock/zjk.

Behind the scenes, the E.U. is every bit as desperate — arguably more desperate — than the U.S. to stem the flow of cheap steel imports. European steel producers are constantly berating their own governments — and particularly the E.U. — for not doing more to reduce the threat. At the recent G20 Summit, European Commission president Jean-Claude Juncker pressured China to address its steel overcapacity saying at a press conference in Hangzhou last week that the summit “must urgently find a solution to the problems facing the steel industry,”  according to the South China Morning Post.

G20 Frustration Over Steel Overcapacity

Juncker wasn’t finished. He went on to say China’s steel exports to the E.U. increased 28% in the first quarter while prices fell 31% in the same period. He said steel overcapacity in China was twice the output in the E.U. and this was “a serious problem” adding the European steel sector had lost 10,000 jobs in recent years.

But, as a recent Reuters article observes, the size of China’s overcapacity — estimated at 300 million metric tons — is so vast compared to the targets they have set to reduce capacity — a scant 45 mmt  this year — that it will take years for closures to have any meaningful impact. Nor will China’s more modest targets not be without severe cost and unrest in the steel-producing regions of the world’s largest nation where the closures will likely occur.

Most generally acknowledge that early closures in the plan are more likely to be the permanent closures of currently mothballed plants rather than the closure of fully operational facilities, but that won’t reverse the sting much for workers hoping their plants reopen and not close for good.

How Quickly Can Shutdowns Even Occur?

Analysts at Macquarie Bank are quoted by Reuters as saying that “while rhetoric and news flow remains highly visible, our industry contacts continually tell us that they do not believe that capacity closures (…) will have any impact on output or prices.”

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In short, neither approach — the E.U.’s good cop routine or the U.S.’s bad cop act — appear likely to have much impact in stemming flows of metal. Maybe the U.S. has it right. The only answer is to put up insurmountable barriers such as punitive tariffs and leave China to sort out what it does with its excess production.

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