Above: Ladle charging: Moving hot metal to a basic oxygen furnace to make steel at Pohang Iron and Steel Co., South Korea. Photo: worldsteel/Seong Joon Cho.

33 nations outline the steel sector’s ‘plague,’ but collective action has yet to provide a cure

January 2018 - Recognizing that the steel sector “has been an important conveyor belt linking economies throughout the world in the past 40 years,” a G20 international committee finds that overcapacity continues to plague the sector.

“It creates significant difficulties for steel producers in advanced, emerging and developing economies alike,” according to a report issued Nov. 30 by the Global Forum on Steel Excess Capacity. The forum unites 33 member economies representing more than 90 percent of global steel output.

The situation, which has become particularly acute since 2015:

• Depresses prices

• Undermines profitability

• Generates damaging trade distortions

• Jeopardizes the very existence of companies and branches across the world

• Creates regional imbalances

• Undermines the fight against environmental challenges, and

• Destabilizes world trading relations.

A worker performs quality checks on coil at Tata Steel’s plant in Kalinganagar, India. Photo: worldsteel/Prasenjeet Gautam

“It especially undermines income opportunities of employees. Alleviating excess capacity becomes a necessary condition for more stable, profitable and sustainable business and employment conditions, which allows the industry to face a number of long-term challenges more effectively,” the report states.

There is a complex web of economic and structural needs across continents and regions. Emerging economies do what’s necessary to foster development of industry despite an oversupplied world, whether it’s direct state ownership or tax breaks. Developed economies also provide financial assistance to the industry for the sake of job creation. The forum’s 52-page report duly notes which countries are doing what to support their steel industries, and which ones are trying to restructure inefficient capacity.

Capacity data for 2014 to 2016 shared by G20 forum members suggest the overcapacity situation recently may have eased slightly, but “not enough to meaningfully reduce the structural imbalance and avoid problems going forward,” the report points out. Although the European Union, China and Japan cut capacity since 2014, member nations like India, Indonesia, Mexico, Brazil and Turkey registered increases.

Thirty-two of the 33 members “indicated that there are no explicit limitations on crude steel capacity additions, at both the central and regional levels, in their economies.” China, however, has set targets to reduce crude steelmaking capacity by 100 million to 150 million metric tons from 2016 through 2020.

In its statement, China said it is working to facilitate the shutdown of production that fails to meet laws and regulations on environmental protection, energy consump- tion, quality, safety and technology standards, and is encouraging the exit of inefficient capacities based on market principles. The country is also earmarking 100 billion renminbi to resettle workers affected by capacity reductions in both the steel and coal sectors.

North America

According to responses to a forum questionnaire for all members, U.S. trade negotiators say the nation has no “established central government plans, targets or subsidies to achieve the net expansion or reduction of steel capacity, because those approaches risk creating serious market distortions while resulting in unfair trade.”

U.S. steel employment declined 33 percent over the last two decades, while steel production dropped 43 percent from its 1973 peak to 2016. “This has reinforced the U.S. commitment to combat unfairly traded imports and address global excess capacity, particularly in view of the Global Forum’s limited results,” the U.S. government states in the report.

Photo: worldsteel—Seong Joon Cho

Mexico did not provide its policies and views on addressing capacity to the forum.

“Canadian producers have suffered downward pressure on prices and injury from dumped and subsidized imports,” the government states. Steel employment in Canada fell 43 percent between 2001 and 2016. In 2014 and 2015, two of Canada’s three largest integrated steel producers sought protection from creditors.

M&A hazards

The forum noted that merger and acquisition activity does not “necessarily guarantee that capacity will effectively be closed.” That has been vividly true in the United States, as acquirers see a chance to compete as a low-cost producer, at least regionally, when they’ve purchased assets at distressed prices and shed previous labor obligations.

“A variety of obstacles can impede industry restructuring and capacity reduction through M&As.” For example, mergers “may escalate financial challenges because extremely large companies are more prone to moral hazards, namely that the merged company may have no incentives to correct inefficiencies and restructure if it is ‘too big to fail.’” The forum suggests acquirers “respond to market signals by enhancing efficiency.”

Key recommendations

The Global Forum will meet three times a year to further discuss, assess and review the information it has gathered; ask questions and provide answers; and share best practices. As a priority for 2018, forum members are expected to apply the agreed principles and recommendations.

During the first half of 2018, members will share information on the steps taken to eliminate market-distorting subsidies and other types of support by governments and related entities, as well as tangible and swift policy action for their removal.

The forum members are also tasked with sharing best practices of steel industry adjustment and exchange experiences on new sources of steel demand.

The forum will report on the process and concrete outcomes in addressing excess capacity and the removal of market distorting subsidies to G20 members and to interested countries belonging to the Organization for Economic Cooperation and Development (OECD).

Photo: Shawn Koh

Industry reactions

The OECD’s secretary-general, Angel Gurría, says the Global Forum’s agreement “confirms the relevance of the G20 in crafting collective solutions to global problems. Ministers agreed on a roadmap to reduce steel excess capacity. This will contribute not only to a more stable and sustainable steel sector, but is also an opportunity to reduce trade distortions and improve our trade relations more generally,” says Gurría.

Axel Eggert, director general of the European Steel Association (Eurofer) notes that, “Never before have countries worked together—at a global level—to develop a policy inventory as comprehensive as this one for steel.” He calls the agreement a “significant step forward because all market-distorting policies and practices, beyond World Trade Organization rules, are targeted.”

He credits China’s efforts to curtail “its massive excess steel capacity.” However, he warns that unless “governmental support schemes … are removed, we will continue to see significant distortions in the global steel industry.”

Thomas J. Gibson, president and CEO of the American Iron and Steel Institute, Washington, D.C., says AISI members appreciate “the leadership and commitment of the U.S. government to address the global steel overcapacity crisis and the market-distorting government policies and practices that have driven it.”

These and the other policy recommendations presented by the Global Forum “will only be meaningful if they are actually implemented,” Gibson says. “Promises alone will not solve the problems facing the global steel industry; concrete actions by governments must follow in short order.”

A labor organization was more pointed. “This may be viewed as a victory for forum participants, but for [U.S.] workers, it is just another sign that political leaders are fiddling while Rome burns,” states the United Steelworkers union, Pittsburgh.

Although USW appreciates the U.S. negotiators’ strong stances, a spokesman says, “the report fails to identify specific disciplines, timelines or targets for resolving the problem. A real plan for action is the only thing that will work.” MM