This morning in metals news, we updated our China MES page on market-economy status, steel production dropped in the Great Lakes region and the White House still hopes for a […]
Tag: China MES
We’ve seen a lot of numbers being thrown around over the past year when it comes to trade actions and enforcement. From the steel industry’s Section 337, to a Section […]
Let’s set aside Donald Trump’s one-track talk on China as a currency manipulator for just a sec, and focus on a slightly less understood, and arguably bigger, issue — the role of […]
Whether you’re a regular MetalMiner reader, or have never heard of us before, you’re likely familiar with the outsize role China has played in trading with the Western world — and especially […]
There has been considerable concern in the U.S. and elsewhere that China’s exports of primary aluminum are damaging global prices. China would maintain that it imposes an export duty on primary aluminum explicitly to prevent the export of primary metal, largely seen as exporting energy due to the high power cost associated with producing each metric ton of the metal.
Many outside China believe a considerable amount of metal leaks out of the country in the nominal form of semi-finished products which avoid the export duty, and, indeed, attract a value-added tax refund, only to be subsequently remelted. Large volumes of exports from China make their way to Vietnam, and it is believed much of this material is remelted in the country before being sold.
The Impact of Chinese Aluminum
However, our concern in this article is not so much the impact of primary metal leakage, considerable as it may be, but rather the growing threat of Chinese value-add product manufacturers and the impact they are having on western firms that had previously had the field cornered for automotive and aerospace — to name but two high-tech applications for aluminum — applications.
Chinese material at the end of the last century was considered a joke in terms of quality, but over the first 10 years of this century the country has invested heavily in European and Japanese extrusion, rolling and heat treatment plants and equipment. By the beginning of this decade, Chinese extrusions and commercial sheet/plate were being given equivalence to material from many other sources such as Russia, Turkey, South Korea, Taiwan and other locales.[caption id="attachment_75243" align="aligncenter" width="550"] Are aluminum slabs welded together really “deep-processed extrusions?”[/caption]
Such material is still sold at a discount to European or North American semi-finished products, but its growing penetration and the willingness of major distributors to hold a proportion of their inventory as Chinese material, speaks volumes for its growing acceptance, particularly in terms of quality.
The Lucrative Automotive Market
Still, while china — and to a lesser extent mills in places like Malaysia, Turkey and other locales — gradually ate into western mills’ commodity products, those same western mills moved upstream, investing heavily to meet growing demand for automotive sheet and castings, aerospace sheet, plate and extrusions.
But now, Chinese manufacturers are beginning to enter these markets with a number of Chinese mills gaining Boeing and Airbus approval, underlining their intentions to take a slice of this lucrative market.
Zhongwang Aluminium’s daring announcement that it intended to buy Aleris for $2.3 billion marked a new turning point, in which Chinese firms not just invested at home in the hope they could gradually expand exports of aerospace and automotive products, but are now even looking at taking over the crown jewels of western aluminum producers.
China Zhongwang certainly has enough money and clout to buy its way into the market, it is the world’s second-largest aluminum extruder and has ambitious plans to grow further. The use of aluminum by the automotive sector had been seen by western firms as a major source of growth for a decade to come, and a sector in which they had relatively little competition outside the US and Europe.
The use of aluminum alloy in a car’s main structure will rise by 17.5% each year between 2015 and 2025, Goldman Sachs analysts are quoted as saying by the FT. Growth estimates that have helped support substantial investment by western firms like Aleris, Alcoa and others to meet anticipated demand.
The arrival of the Chinese has the potential to upset that dramatically. The U.S.-based Aluminum Extruders Council has said Zhongwang’s takeover of Aleris “raises very serious concerns for the entire aluminum industry,” and is trying to mobilize support to block further Chinese penetration. We are already seeing the use of anti-dumping and similar litigation as we have in steel to protect domestic producers currently doing very well out of the sector but fearing major disruption is only just over the horizon.
Jean-Claude Juncker, president of the European Commission, is reported by the London Telegraph to have warned China that the country’s chances of gaining market economy status are directly related to its steel exports.
In a speech in China, Juncker is reported to have said “I do not want to dramatize this issue… but there is a clear link between the steel overcapacity of China and the market economy status for China.”
Steel Overcapacity Through the Years
China makes more than half of the world’s1.6 billion metric tons of steel but it’s suffering from slowing domestic demand and has turned to exports to dispose of its surplus. In the first quarter of the year Chinese steel exports to the European Union rose 28%, driving prices down by more than 30% according to some reports.[caption id="attachment_77672" align="aligncenter" width="550"] Beijing wants to shut down unprofitable steel production, but the provinces are merely reclassifying the mills and giving them new loans.[/caption]
Although China has made conciliatory comments, Chinese Foreign Minister Wang Yi said this week the E.U. and China were forming a bilateral mechanism to review, discuss and deal with overcapacity in the steel industry. Beijing may have it’s work cut out for it if it actually wants to force through closures. The government has been trying it reign in excess capacity for some time, restricting credit and urging provinces to close older polluting plants but a recent Reuters article suggests provincial governments are doing anything but cooperating.
As part of China’s economic efficiency goals, the State Council earlier this year set capacity reduction targets for regional and central government enterprises in such sectors as steel, coking coal and cement, while China’s banks have been ordered to slash lending to loss-making and delinquent corporate borrowers. But provincial governments have quietly been urging their local banks to keep the taps open, and to even offer further loans to pay off old non-performing ones in order to keep steel and coal companies open.
In Henan, Reuters reports the provincial government has asked local bankers to help companies in coal, steel, metals and construction materials to switch industry classification so they don’t fall into categories covered by lending restrictions set by banks’ headquarters, according to a document published on the Henan government’s website in May.
Provincial governments are in an awkward position. They are charged with maintaining employment and prosperity, but also directed to close plants deemed unnecessary. For the time being, they appear to be responding to local pressures rather than Beijing. It will be interesting to see if the E.U.’s stark warnings add any impetus to the process, Beijing desperately wants recognition as a market economy, and may be prepared to get tough with industry in order to achieve it. Whether that will come soon enough for the E.U.’s beleaguered steel industry is another matter.
The U.S. warned China on Thursday that it had not done enough to qualify for market economy status, especially in steel and aluminum and pushed the two trading partners closer to a full-on trade war between Washington and Beijing at the end of 2016.
U.S. trade diplomat Chris Wilson told the World Trade Organization meeting that the expiration of a clause in China’s original petition to join did not require other WTO members to automatically grant China market economy status on Dec. 11.
Instead, China must establish under each WTO member country’s domestic law that it is a market economy, he said, according to an outline of his remarks seen by Reuters.
“Second, there is little doubt that China’s market reforms have fallen short of the expectations that were held by many members when China joined the WTO,” he said. “This is particularly evident in the steel and aluminum industries where China’s pervasive interventions have led to a significant overcapacity of global supply that is threatening the viability of competitive firms in these industries around the world.”
The two giant trading partners have been locked in a war of words about China’s ascension for more than a year now.
The EU and China Announce ‘Bilateral Mechanism’
Meanwhile, China and the European Union agreed to establish a bilateral mechanism to deal with overcapacity in steel, Chinese Foreign Minister Wang Yi said on Thursday.
China is by far the world’s biggest steel producer and its annual output is almost double that of the 28-nation EU.
Rival producers have accused China of selling into export markets at below cost after a slowdown in demand at home, causing a crisis for the industry that has led to job cuts and plant closures.
“Through this bilateral mechanism, the two sides can have … in-depth discussions to find solutions acceptable to both parties and in this way maintain free trade and sustainable development of the global economy,” Wang said.
Wang did not provide details on the planned mechanism.
Jennifer Diggins is the director of Government Affairs at Charlotte, N.C.-based Nucor Corp., the largest steelmaker in the U.S. and North America’s largest recycler of any material (Nucor recycled 16.9 million tons of scrap steel in 2015 at its 23 electric arc furnace mills). Diggins serves as the firm’s liaison to Washington, D.C. MetalMiner’s editorial staff recently had a chance to sit down with Jennifer for a MetalMiner Q&A to discuss recent issues in steel, including Chinese overproduction, the tariffs recently passed against some imports and the role of the international scrap market.
MetalMiner: Recently, executives from the five leading steel companies in the U.S. told the Congressional Steel Caucus that unfair foreign trade practices have caused an increase in steel imports resulting in the loss of more than 13,000 jobs in the industry this year. How was that number arrived at? Could it be even worse than the 13,000 estimated?
Jennifer Diggins: There is the potential for the number to be much worse when you factor in job losses in industries that support steel.
People often fail to appreciate the broad impact the steel industry has on the rest of the economy. Every one job in the steel industry supports seven other jobs in the economy. These are jobs in businesses that supply steelmakers with raw materials, contractors who do maintenance work at steel mills, truck drivers who transport our products, just to name a few. When steel production decreases like it has, workers in these supporting industries also are impacted.
MM: Chad Utermark, EVP of Nucor testified that, “From outright government ownership to a vast array of illegal subsidies, many foreign steel companies are shielded from the realities of the market. China is the prime example. Basically, the Chinese government is a company disguised as a country engaged in economic warfare. It is the major contributor to the capacity glut. China’s economic slowdown, coupled with its estimated 425 million metric tons of excess capacity, has resulted in China flooding the global market with steel exports. This market-distorting behavior is creating real harm for American steelworkers.”
Knowing all of this, how dangerous and inappropriate is the prospect of China being granted market economy status?
JD: First off, there is no reason to grant China market economy status. There are criteria in U.S. law that China must meet to receive this designation. In the past 15 years, China has failed to take the required steps to meet these criteria. They have made this patently obvious through continued government ownership of major industries, the unprecedented government intervention in the stock market last year, and their most recent five-year plan which keeps the government firmly in control of the economy. None of this is free market behavior. Therefore, the U.S. government has no reason to change its determination that China is a non-market economy.
Were they to be granted market economy status it would be disastrous. It would change how the government calculates dumping, which would result in lower trade duties on steel and steel products. China’s disregard for trade laws would basically go unpunished leading to even more job losses in the steel industry and the manufacturing sector as a whole.
MM: According to U.S. Geological Survey estimates, the total value of ferrous scrap processed in the U.S. in 2014 was $26.1 billion, but for 2015 USGS reports that figure declined to $18.3 billion as scrap prices and volumes declined. Is the scrap situation also a result of those 800 million metric tons of Chinese imports? At least in part? And how much of an impact does that have on mills that use scrap-melting EAFs?
JD: Imports do play a role. Last year, unfairly traded imports grabbed 29% of market share — a record high. The result was a capacity utilization rate of around 70% for the U.S. steel industry. If you produce less steel, you use less scrap, which increases supply and drives down prices. With China’s exports flooding markets around the globe, production and scrap demand decreased in other countries, too. China makes more steel than the rest of the world combined. The percent of its production that is scrap-based EAFs is still in the single digits.
While lower scrap prices do decrease raw material costs for EAF producers, the savings are not nearly enough to offset the financial hit of making less tonnage and selling it at lower prices.
MM: Industry executives testified before two government offices in addition to the Steel Caucus last week, the U.S. Trade Representative and the U.S. Department of Commerce. Could you tell us more about what was discussed with the agencies? And what the industry hopes to gain from these meetings?
JD: The primary focus was the problem of global steel production overcapacity and the crisis it has created for domestic steel producers. We stressed three things. First, vigorously enforce our trade laws and use the full-range new of enforcement tools Congress provided.
Second, work to eliminate steel-specific subsidies many foreign governments provide. Finally, secure specific, verifiable commitments from China and other countries to reduce excess steel capacity. We were looking for a strong commitment from our government leaders to enforce our trade laws and take the lead in getting excess capacity out of the market.
MM: It looks as if tariffs are finally starting to be felt in the domestic steel market. Does more need to be done to level the playing field, even though prices are climbing?
JD: Until we get excess global production capacity offline, unfair imports, decreased production and lower prices will remain an issue. The good news is that there is a growing international consensus that bold action is needed to address overcapacity.
The Organization for Economic Cooperation and Development recently held a meeting with leaders from 34 governments and steelmakers that represented 93% of global steel production to discuss ideas for removing excess capacity.
Our country is not alone in recognizing that much of the overcapacity problem is in China. Of the 700 mmt of excess steelmaking capacity in the world, 425 mmt are in China. Our government put out a strong statement when China failed to engage seriously in the talks and other governments were critical as well.
The U.S. government made it clear it will continue to use all the trade enforcement tools at its disposal if China fails to act. We will continue to work with our international allies to secure commitments from governments to get out of the steel business.
Note: An earlier version of this story said that Diggins was Nucor’s only federal lobbyist. Nucor operates a Washington, D.C. office (Nucor Public Affairs) with other lobbyists listed and Diggins is actually not a federally registered lobbyist for 2016 (she was in 2015). We regret the error.
The U.S. steel industry has been aggressively addressing imports of Chinese steel through the filing of multiple anti-dumping and countervailing actions in recent months.
The enforcement of these trade laws is the responsibility of U.S. Customs and Border Protection. In Salt Lake City earlier this month, the American Iron and Steel Institute and Metals Service Center Institute held their general meetings where steel industry executives discussed why Chinese steel imports are of particular concern to the U.S. steel industry.
CBP Chairman R. Gil Kerlikowske explained in his speech, “Protecting Our Borders, Protecting Our Industry” how CBP enforces U.S. trade law, saying that the title of his speech, “really speaks to the duality of CBP’s complex mission, which is facilitating lawful trade and travel while ensuring the safety and security of our borders and the global supply chain.”[caption id="attachment_77672" align="aligncenter" width="550"] U.S. Customs and Border Protection explained its processes for dealing with illegally dumped steel products at the AISI/MSCI general meetings earlier this month. Source: Adobe Stock/ZJK.[/caption]
The overarching theme of the annual conference was that the U.S. is in an economic war with China, and CBP knows it is on the “front lines of our nation’s economic security.”
The newly elected chairman of AISI — John Ferriola, chairman, president and CEO of Nucor Corp. — said at the conference’s AISI CEO press briefing that one in three tons of steel is produced outside the U.S. while capacity utilization of U.S. steel mills remains around 70%. We at MetalMiner have also painstakingly documented how China manipulates its currency to take advantage of export markets for steel and other products that are overproduced at home.
The Steel Crisis
U.S. producers claim that Chinese overcapacity coupled with decreased Chinese steel demand is creating a crisis for the U.S. steel industry. High levels of dumped and subsidized imports are entering the U.S. market. Nine of 10 of the largest Chinese steel mills are state-owned. Last year, China exported 112 million metric tons. Ferriola said boldly, “The Chinese government is a company disguised as a country, and they are waging economic war on the United States, and they are winning.”
Kerlikowske explained how CBP is enforcing the 270 anti-dumping and countervailing duty actions currently active in metal products. He was insistent upon CBP, AISI and steel companies working together to ensure trade with the U.S. is fair.
Customs’ Enforcement Strategy
CBP, in partnership with the steel industry, conducted seminars for CBP personnel and customs brokers in five locations last year with additional seminars taking place in Detroit, Long Beach, Calif. and Philadelphia this year.
CBP has taken a three-pronged approach which includes detecting high-risk activity, deterring non-compliance and disrupting fraudulent behavior. CBP is now using statistical modeling to identify high-risk steel shipments. CBP has also implemented “live” entry on some Chinese steel plate shipments, meaning that all entry documents and duties must be submitted before CBP releases the cargo into the U.S.
The most important transformation initiative, as termed by Kerlikowske, is the creation of 10 Centers of Excellence and Expertise which are remotely-managed centers aligning CBP with modern business practices, focusing on industry-specific issues and developing greater expertise in particular industries and commodities.
The CBP’s Base Metals Center opened in March in Chicago but it’s supported by CBP employees throughout the U.S. The Base Metals Center enables CBP to sharpen its focus on anti-dumping and countervailing duty evasion particularly involving steel and other base metals products.
The center provides consistency and reliability for metals importers. CBP industry experts at the Center are actively enforcing 270 active orders on metal products, and are working closely with the industry to understand trade risks and target evasion to ensure a level playing field for U.S. steelmakers.
The U.S. steel industry is counting on CPB to create that level playing field for domestic steel producers. The Base Metals Center seems to be the right approach for getting a handle on the complexities of trade in the global steel industry.
The “live” entry of high-risk steel plate shipments could be expanded to other products, too. The U.S. steel industry has successfully placed a great deal of pressure on domestic authorities and regulators. to keep Chinese steel imports at bay, but I wonder for how long that strategy will be successful.
Free Download: The May 2016 MMI Report
Will the buyers of these metals, U.S. manufacturers, push back against the domestic producers if their products can no longer be competitively priced without abundant, cheap Chinese steel available?
As part of the World Trade Organization, China is scheduled in December 2016 to achieve Market Economy Status, as opposed to its current Non-Market Economy status. This means, among other things, it will be much harder for US, Canadian or Mexican steel companies to bring anti-dumping actions against Chinese imports of steel and hundreds of other products. Some believe that status upgrade will be automatic, but not the NAFTA steel sector.
“We don’t believe [Market Economy Status] happens automatically,” said Thomas J. Gibson, president and CEO of the American Iron & Steel Institute. “Under US law there are criteria, six, by which China’s status as a market economy should be judged. And we are just drawing the US government’s attention to that and asserting that China should not become a market economy. Our main focus was to impress upon our elected officials the urgency of the crisis. The focus was on the breadth of the problem.”
NAFTA United Against Chinese Market Economy Status
Gibson was speaking during a press conference and conference call that featured several North American steel industry executives speaking with one voice against China’s potential ascension to market economy status. It’s an issue that has united Canadian, US and Mexican steel producers and given the sometimes disparate North American Free Trade Agreement partners solidarity against what they see as a flood of particularly Chinese imports that has grown to 30% of the North America market for the first time ever.
Last week, AISI released a commissioned report concluding that treating China as a market economy in anti-dumping investigations would “severely damage the NAFTA steel industries and harm NAFTA economies.”
Six steel industry groups sponsored the report: AISI, the Steel Manufacturers Association, the Canadian Steel Producers Association, CANACERO (the Mexican Iron and Steel Producers’ Association), the Specialty Steel Industry of North America and the Committee on Pipe and Tube Imports.
Has the EU Already Decided for China?
Of course, the North American associations aren’t alone in this fight. European Union lawyers have already concluded that China should be formally designated a “market economy” at the end of next year. The EU would have been a powerful ally for North America.
The European Commission’s legal service circulated a confidential opinion within the institution this past summer, officials familiar with the opinion said. The confidential opinion is not binding, and the EU may still oppose China’s “graduation,” but it’s still a blow to the organizations proposing full review and not a standard graduation to market economy status for China.
The Problem With China: Overproduction
The main argument the US, Canadian and Mexican steel producers make would likely hold as much weight with the EU member nations as it does for NAFTA’s: That Beijing’s policies lead Chinese firms to pump out far more goods than China’s domestic market can consume. Or overseas markets, for that matter.
“There are almost 700 million metric tons of overcapacity globally,” said Nucor CEO John Ferriola in last week’s press conference. “That’s almost half China’s. We must allow basic market forces to influence China’s production.”
Ferriola said the case that he and his fellow steel executives made to their representatives in congress was that the ENFORCE Act, a bill stuck in congress after previous legislation was passed to address dumping, would do this. Ferriola called it a “major piece of unfinished business.”
ENFORCE would change customs enforcement and stop trans-shipments which the domestic producers say are being sent from China and other nations where their origins are concealed by relabeling and other shipping tricks. It also has a much more comprehensive definition of “material injury” than current anti-dumping laws.
The bigger issue, even if ENFORCE passes, however, would still be China achieving market economy status. The Canadian Steel Producers’ Association predicted that 400,000 to 600,000 NAFTA jobs will be lost if nothing is done about Chinese exports.
“Our main focus was to impress upon our elected officials the urgency of the crisis. The focus was on the breadth of the problem,” Gibson said.