A banner reading &#;No more Chinese steel&#; is displayed on a fence, during a protest held by steel workers of the Huachipato steel plant in Talcahuano, Chile, on April 4, . (Photo: Guillermo Salgado/AFP)
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The Latin American steel industry is facing a crisis due to China&#;s unfair trade practices, which flooded the market with cheap steel, threatening regional producers&#; jobs and livelihood, Radio France International reported.
&#;China&#;s production affects Latin American economies, putting at risk 1.4 million jobs in the steel sector; forcing the suspension of operations of several companies and massive layoffs,&#; Gabriela Fajardo Mejía, an expert in international relations and doctoral candidate in Global Society Law at the University of Navarra in Spain, told Diálogo on May 28. &#;[Production] is not subjected to environmental and quality standards. Chinese companies do not comply with rules of transparency and regulations.&#;
China&#;s strategy of selling its product below market prices has triggered a dumping situation that severely affects Latin America. According to data from the World Steel Association, China&#;s share of global crude steel production reaches 54 percent. Between January and April alone, China produced 343.7 metric tons of steel.
&#;The slowdown in China&#;s real estate and construction business caused domestic demand for steel to decline, leaving producers dependent on other countries to make up the shortfall,&#; Henry Ziemer, research associate with the Americas Program at the Center for Strategic and International Studies, told Diálogo. &#;As the U.S. market looks increasingly unfavorable for Chinese steel producers, they are now looking to Latin American countries with fewer trade barriers to get rid of excess capacity.&#;
In addition, the Chinese government subsidized steel production and exports during the pandemic. This caused a wave of cheap Chinese steel to spread around the world, Colombian newspaper El Tiempo reported.
Mexico, Chile, and Brazil have significantly increased tariffs on steel imports from China to protect domestic companies, with other countries in the region likely to follow suit.
Cheap Chinese steel is sinking the Latin American steel industry, causing several of the region&#;s large companies to freeze or shut down operations, the Latin American Steel Association (Alacero) said in a statement. For Alejandro Wagner, Alacero executive director from June 1, to June 1, , the situation is creating a &#;process of deindustrialization in the region,&#; he told BBC.
In March, Chile&#;s Compañía de Aceros del Pacífico (CAP) suspended operations at its emblematic Huachipato industrial plant, citing its inability to compete with Chinese prices, and stressing that China&#;s dumping has affected the economic and social development of the region. The company resumed activities after the government imposed a temporary tariff on Chinese steel imports. The Huachipato&#;s board of directors expressed hope that the measure would become definitive.
Similarly in Colombia, the steel industry is asking for fair competition, as they experience the devasting rippling economic effects. &#;We have been enduring unfair competition for two years through massive imports from China and Russia at predatory prices, even 40 percent below international and market prices,&#; Fabio Galán, president of Acerías Pazdelrío, told daily El Colombiano.
&#;In the past there have been reports that iron ore mines in Mexico, raided by organized crime cartels, played an important role in shipping looted iron ore to China, which was then converted into steel,&#; Ziemer said. &#;These reports provide additional evidence that China&#;s unfair and opaque trade practices create perverse incentives within the hemisphere, which can encourage criminal organizations and undermine the quality of governance.&#;
Brazilian steel producer Gerdau announced in March that it would temporarily lay off workers at its São José dos Campos plant, in São Paulo, blaming it on China&#;s unfair competition. Gustavo Werneck, president of the company, told the Brazilian media InfoMoney that these measures are only the first step to contain the Chinese surge.
&#;In addition, China subsidizes its companies in the sector, which allows lowering their costs. It is mainly worrying that quality and environmental standards for this production are not a factor taken into account by the Chinese government, but it is even more worrying that they are not a factor to be considered by steel buyers in Latin American countries, who to the detriment of their own local industry are mainly influenced by the low price,&#; Fajardo Mejía said. &#;While Latin American steel mills emit 1.55 tons of carbon dioxide (CO2) per ton of steel produced, China emits 2.24 tons of CO2, which represents 45 percent more pollution.&#;
The imposition of tariffs on China&#;s steel as a response to its unfair practices also underscore the potential for trade tensions between the Latin American countries and China, with a potential for retaliation from the Asian country, known for its coercive diplomacy.
For instance, China banned soy-based products from Argentina in in response to far-reaching anti-dumping measures, Argentine daily La Nación reported. In , following the arrest of a Huawei executive in Vancouver, China suspended all purchases of Canadian canola seed, AP reported.
&#;China produces more steel than the next nine steel-producing countries combined, giving it a powerful tool to influence prices and disrupt local economies,&#; Ziemer said. &#;However, the fact that this latest round has targeted countries like Chile and Mexico may present an opportunity for the United States to coordinate with Latin American countries on ways to mitigate China&#;s unfair trade practices and protect their domestic industries.&#;
China has approximately 10 times the steelmaking capacity of the United States. It has been accused of dumping cheap steel on the global market to beat out competitors, and the Trump administration has encouraged Chinese leaders to cut production in order to improve the profitability of U.S. steelmakers. In , China cut overcapacity in the steel sector by shutting down about 50 million tons for domestic environmental and economic reasons.
The country was the largest exporter of steel in the world in , and its steel exports represented approximately 24 percent of all steel exported globally in .
In , the Chinese economy was slowing down, and the demand for steel, iron ore and other ferrous metals declined significantly. The policies, subsidies and dumping margins imposed by the Chinese government impacted stock prices of many global steel companies, with major metal companies like Anglo American and Rio Tinto taking a hit. Here's a look at the state of the global steel industry more recently and the impact of the Chinese economy.
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Anatomy of the Global Steel Industry
Steel is one of the most innovative and flexible alloys, which can be customized for many requirements. Variants of steel are used in housing, transportation, industrial, automobile, infrastructure and utilities sectors, making it one of the world's most versatile materials, one that's easily reused and recycled. (For more, read: Strength in Steel.)
China, Japan, India, the United States and Russia were the top five steel-producing nations in , in that order, with China the leader by far. In , China produced 831 million metric tons of crude steel, Japan produced 104.7 tons, the United States produced 116 tons, India produced 101.4 tons and Russia produced 71.3 tons, all far below the leader. While China and Japan are the top exporters of steel, the United States and Germany are the leaders for imports because of their economies' high consumption rates.
China is the world's largest producer of steel, and it is also the world's largest consumer of the material. Given such a dominant market share, along with the large amounts of steel used across different sectors of its economy, any slowdown in the Chinese economy will have a major impact on the global steel industry. The graph below shows what happened to the VanEck Vectors Steel ETF (SLX) in when the Chinese economy slowed down.
Image by Sabrina Jiang © Investopedia
Recent Developments
More recently, global steel output has been increasing, investors fear a slow down in the Chinese economy and the prospect of trade wars initiated by the Trump administration. However, steel prices are on the increase.
The World Steel Association reported that in July , global steel output rose by 5.8% in a month, an increase that follows growth of almost 13% in the same quarter one year ago.
Although China has attempted to cut steel production to mitigate pollution, some plants are ramping up capacity, and China&#;s steel output is on the rise. This increase in output has also maintained the demand for high-grade iron ore, a raw material for steel and a determinant of the cost of steel, and has propped up prices.
In the United States, encouraged by robust domestic demand, domestic steel producers are increasing their steel prices because of increasing input costs and a depreciation in the rupee. Thus, because steel output is growing and prices are increasing, steel companies should see increased earnings and higher share prices.
However, if the demand for steel drops, China will export surplus steel and lower international prices. If output falls, the demand for raw materials will slow down and further affect prices. Thus, China is the biggest influencer on global steel.
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