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Since 2015, global trade protectionism has been on the rise. What prompted this? How will this affect the global steel trade? And what does this mean for future trade and exporters?
Rising Waves of Protectionism The country’s trade protection measures are only diverting imports to more expensive sources, raising domestic prices and providing additional protection to the country’s marginal producers. Using the example of the US and China, our analysis shows that even after the introduction of trade measures, the level of US imports and the level of China’s exports do not differ from what is expected, given the state of the domestic steel market of each country.
The general conclusion is that “steel can and will find a home.” Importing countries will still need imported steel to match their domestic demand, subject to basic cost competitiveness and, in some cases, ability to produce certain grades, none of which are affected by trade measures.
Our analysis suggests that over the next 5 years, as China’s domestic market improves, steel trade should decline from its peak in 2016, mainly due to lower Chinese exports, but should remain above 2013 levels. According to the CRU database, over 100 trade cases have been filed in the last 2 years; while all major exporters were the main targets, the largest number of trade cases were against China.
This suggests that the mere position of a major steel exporter increases the likelihood of a trade lawsuit being filed against the country, regardless of the underlying factors in the case.
It can be seen from the table that the majority of trade cases are for commercial hot-rolled products such as rebar and hot-rolled coil, while fewer cases are for high value-added products such as cold-rolled coil and coated sheet. Although the figures for plate and seamless pipe stand out in this regard, they reflect the particular situation of overcapacity in these industries. But what are the consequences of the above measures? How do they affect trade flows?
What is driving the growth of protectionism? One of the main factors driving the strengthening of trade protection over the past two years has been the increase in Chinese exports since 2013. As shown in the figure below, from now on, the growth of world steel exports is entirely driven by China, and the share of China’s exports in total domestic steel production has risen to a relatively high level.
Initially, especially in 2014, the growth of Chinese exports did not cause global problems: the US steel market was strong and the country was happy to accept imports, while steel markets in other countries performed well. The situation changed in 2015. Global demand for steel fell by more than 2%, especially in the second half of 2015, demand in the Chinese steel market fell sharply, and the profitability of the steel industry fell to extremely low levels. CRU’s cost analysis shows that the export price of steel is close to variable costs (see chart on next page).
This in itself is not unreasonable, as Chinese steel companies are looking to weather the downturn, and by the strict definition of Term 1, this is not necessarily “dumping” steel on the world market, as domestic prices were also low at the time. However, these exports hurt the steel industry elsewhere in the world, as other countries cannot accept the amount of material available given their domestic market conditions.
In the second half of 2015, China closed its 60Mt production capacity due to harsh conditions, but the rate of decline, China’s size as a major steelmaking country, and the internal struggle for market share between domestic induction furnaces and large integrated steel mills shifted pressure to close offshore production facilities. As a result, the number of trade cases began to increase, especially against China.
The impact of the trade affair on steel trade between the US and China is likely to spread to other countries. The chart on the left shows US imports since 2011 and the nominal profitability of the country’s steel industry based on CRU knowledge of costs and price movements.
First of all, it should be noted that, as shown in the scatterplot on the right, there is a strong relationship between the level of imports and the strength of the US domestic market, as evidenced by the profitability of the steel industry. This is confirmed by CRU’s analysis of steel trade flows, which shows that steel trade between the two countries is driven by three key factors. This includes:
Any of these factors can stimulate steel trade between countries at any time, and in practice the underlying factors are likely to change relatively frequently.
We see that from the end of 2013 to the whole of 2014, when the US market began to outperform other markets, it stimulated domestic imports and total imports rose to a very high level. Similarly, imports began to decline as the US sector, like most other countries, worsened in the second half of 2015. The profitability of the US steel industry remained weak until the beginning of 2016, and the current round of trade deals was caused by a chronic period of low profitability. These actions have already begun to affect trade flows as tariffs have subsequently been imposed on imports from some countries. However, it is worth noting that while US imports are currently more difficult for some major importers, including China, South Korea, Japan, Taiwan, and Turkey, the country’s total imports are not lower than expected. The level was in the middle of what was expected. range, given the current strength of the domestic market prior to the 2014 boom. Notably, given the strength of China’s domestic market, China’s total exports are currently also within the expected range (note not shown), suggesting that the implementation of trade measures has not had a significant impact on its ability or willingness to export. So what does this mean?
This suggests that, despite various tariffs and restrictions on imports of materials from China and other countries into the United States, this has not reduced the country’s overall expected level of imports, nor the expected level of Chinese exports. This is because, for example, US import levels and China export levels are related to the more fundamental factors described above and are not subject to trade restrictions other than outright import embargoes or hard restrictions.
In March 2002, the US government introduced Section 201 tariffs and at the same time raised tariffs on steel imports in many countries to very high levels, which can be called a serious trade restriction. Imports declined by about 30% between 2001 and 2003, but even so, it can be argued that much of the decline was directly related to the marked deterioration in US domestic market conditions that followed. While the tariffs were in place, imports shifted as expected to duty-free countries (e.g., Canada, Mexico, Turkey), but the countries affected by the tariffs continued to supply some imports, the higher cost of which sent US steel prices high. which might otherwise arise. The Section 201 tariffs were subsequently scrapped in 2003 because they were deemed a breach of U.S. commitments to the WTO, and after the European Union threatened retaliation. Subsequently, imports increased, but in line with a strong improvement in market conditions.
What does this mean for general trade flows? As noted above, the current level of US imports is not lower than would be expected in terms of domestic demand, but the situation in the supplier countries has changed. It is difficult to determine a baseline for comparison, but total US imports in early 2012 were almost the same as in early 2017. A comparison of supplier countries over the two periods is shown below:
While not definitive, the table shows that the sources of US imports have changed over the past few years. There is currently more material coming to US shores from Japan, Brazil, Turkey, and Canada, while less material is coming from China, Korea, Vietnam, and, interestingly, Mexico (note that the abbreviation from Mexico may have some attitude towards recent tensions between the US and the US). Mexico) and the desire of the Trump administration to renegotiate the terms of NAFTA).
For me, this means that the main drivers of trade – cost competitiveness, the strength of home markets, and the strength of destination markets – remain as important as ever. Thus, under a certain set of conditions associated with these driving forces, there is a natural level of imports and exports, and only extreme trade restrictions or major market disruptions can disturb or change it to any extent.
For steel-exporting countries, this means in practice that “steel can and will always find a home.” The above analysis shows that for steel-importing countries such as the United States, trade restrictions may only slightly affect the overall level of imports, but from the supplier’s point of view, imports will shift towards the “next best option”. In effect, “second best” would mean more expensive imports, which would raise domestic prices and provide additional protection to steel producers in the higher cost country2, although basic cost competitiveness would remain the same. However, in the long run, these conditions may have more pronounced structural effects. At the same time, cost competitiveness may deteriorate as manufacturers have less incentive to cut costs as prices rise. In addition, rising steel prices will weaken the competitiveness of the manufacturing industry, and unless trade barriers are put in place along the entire steel value chain, domestic demand could fall as steel consumption shifts overseas.
Looking ahead So what does this mean for world trade? As we have said, there are three key aspects of world trade – cost competitiveness, domestic market power, and position in the destination market – that have a decisive influence on trade between countries. We also hear that, given its size, China is at the center of the debate about global trade and steel pricing. But what can we say about these aspects of the trade equation over the next 5 years?
First, the left side of the chart above shows CRU’s view of China’s capacity and utilization until 2021. We are optimistic that China will reach its capacity shutdown target, which should increase capacity utilization from the current 70-75% to 85% based on our steel demand forecasts. As market structure improves, domestic market conditions (i.e., profitability) will also improve, and Chinese steel mills will have less incentive to export. Our analysis suggests that China’s exports could fall to <70 metric tons from 110 metric tons in 2015. On a global scale, as shown in the chart to the right, we believe that demand for steel will increase over the next 5 years and as a result “destination markets” will improve and start crowding out imports. However, we do not expect any major disparities in performance between countries and the net impact on trade flows should be smaller. Analysis using the CRU steel cost model shows some changes in cost competitiveness, but not enough to significantly affect trade flows globally. As a result, we expect trade to decline from recent peaks, mainly due to lower exports from China, but remain above 2013 levels.
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Post time: Jan-25-2023