The trade war between the United States and China is having “no effect” on the Chinese steel sector, which is being propped up by “surging domestic demand”, according to a new study.
New research by US analysts shows that Chinese steel producers are enjoying more exemptions from US President Donald Trump’s tariffs on steel than those from US allies Canada, South Korea, Spain and the United Kingdom.
This is despite the fact that when the tariffs were invoked under Section 232 of the Trade Expansion Act of 1962, ostensibly on grounds of national security, China were expressly named by Trump and his close advisers as the primary target.
But almost one year on from the introduction of the tariffs on steel and aluminium, Chinese steel is enjoying a relative boom.
Exports may have fallen by 8.1 per cent last year to 9.34 million metric tonnes, but China increased its total steel production massively in 2018, from 831.7 million metric tonnes to 928.3 million metric tonnes, almost half the world’s total.
Surging domestic demand helped make up for the loss in export sales, with China being less reliant on steel exports than ever before.
In comparison, American steel production last year was 86.7 million metric tonnes.
US purchases of China’s steel, meanwhile, have been dwindling for a decade, from 5.4 million metric tonnes in 2006, to just 1.2 million metric tonnes in 2017.
They now account for just 2 per cent of US steel imports, with China now selling steel predominantly to other Asian countries.
“The trade war made no impact on the Chinese steel sector in 2018. The Chinese steel industry has seen improving fundamentals in the last few years,” said Laura Zhai, senior director of Fitch Ratings’ Asia Pacific corporate ratings group.
Consolidation of steel mills around China has helped ease overcapacity issues.
The government’s move to pump more cash into the Chinese economy, meanwhile, has helped the sector to recover from a blip in the third quarter of 2018, where tightening cash flow saw people buying fewer cars and household goods, sending steel prices tumbling.
The situation is leading some to question whether containing Chinese steel was the real target of the tariffs, which were lobbied for by the US steel industry, including Nucor Corporation and US Steel Corporation.
The new study by Christine McDaniel, a trade economist at the Mercatus Centre at the George Mason University in Virginia, shows that requests made to exclude Chinese steel products from tariffs have had a 39 per cent approval rating.
Canadian steel, meanwhile, has been exempt from tariffs on 27 per cent of applications, the UK 30 per cent, 8 per cent for South Korea and just 6 per cent for Spain.
Japan had a higher rate of approval for tariff exclusion requests, with 38 per cent of 9,166 steel exclusion requests being successful.
Analysts from S&P Global, a market intelligence firm, said that most of China’s steel exemptions have come in higher products, made by producers such as Baosteel, who can compete in terms of quality with Japanese and South Korean producers.
“Last year when the tariffs first came in, the steel market reacted negatively in China. It’s very sentiment driven, tends to be reactionary to policy announcements,” said Paul Bartholomew, senior managing editor at S&P Global.
“But it returned to fundamentals within a few days. For the first three quarters, the market was very strong and robust, demand was very robust.
“Steel tariffs, the so-called trade war, wasn’t a huge factor. It was playing out in sentiment, but domestic demand was strong enough to save the steel industry.”
Canada, the European Union, Mexico and other countries affected by tariffs on metals have put retaliatory duties on US products.
Some other nations, such as Brazil and South Korea, have been given blanket exemptions, but must import under a quota system.
This is, McDaniel said, having a negative impact on US manufacturing – the base of the economy Trump has promised to resuscitate.
Watch: Is trade war hurting US steel business? (May 2018)
Part of the blame, McDaniel said, lies with the US steel industry itself, which is making objections to tariff exclusion requests made by US manufacturers, on the grounds that they can provide the same product for roughly the same price, even if it has been proven that they cannot.
“Out of the 60,000 exclusion requests that have been filed, only one has been accepted that’s had an objection [from a US steel company]. The other thousands that have been objected have either been denied or still pending. For US manufacturers, whether your request is denied or pending, it’s essentially the same thing: you don’t have access to the tariff free product,” she said.
If a manufacturing company files a tariff exclusion request for a typical type of steel that it usually acquires from Canada or Japan, it takes the Department of Commerce three weeks to process, after which the request is posted online.
US steelmakers then have 30 days to file an objection, which can be filed on the grounds that they can supply the same product within five weeks.
“There are so many cases where the US manufacturer will file an exclusion request, then the steelmaker files an objection saying they can make it. The manufacturer files a rebuttal saying that they have documents saying that they have requested the US steelmaker to make that type of product in the past, and they could not do it,” McDaniel said.
“You have a situation where US steelmakers are deciding who pays tariffs. If they say they can make it for you, you’re out of luck, even if they can’t.”
The situation has been a thorn in the side of the many sectors of US manufacturing, including the chemicals industry, which is reliant on imported steel products to build factories.
Access to huge shale oil and gas reserves in the US led to a rush of investment, with international chemicals companies among those building American factories to tap cheap and abundant raw materials.
However, the steel tariffs and quotas are threatening to jeopardise the resurgence, said Edward Brzytwa, director for international trade at the American Chemical Council.
“The estimate is that it takes about 16,500 tonnes of steel to build an ethylene cracker, which looks like a giant steel jungle gym, they’re very steel intensive. Not only are we paying more for steel to build manufacturing facilities, but the US is also using quotas on certain countries, such as South Korea, Argentina and Brazil,” said Brzytwa, who was formerly the director of Asia-Pacific Economic Cooperation affairs at the Office of the United States Trade Representative.
“Some of our members had to find their way around the quotas to bring in the really specialised steel they needed to build their product.”
US steel producers, on the other hand, benefited from higher prices in the immediate aftermath of the tariffs, but that has moderated slightly.
“US flat [coil] steel prices did climb in the wake of the tariffs being introduced, but some of the price climb can also be attributed to the corporate tax cuts in the US and the healthy economy last year, which stimulated investment,” said Bartholomew.
“Prices have come off again and are now back at roughly the same level as before the tariffs were introduced. US steel mill capacity utilisation rates are at 81.5 per cent currently, but the downturn in the [car] sector is crimping demand a bit.”
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