In October last while releasing the World Steel Association’s (WSA’s) short range outlook for steel in 2018, TV Narendran, chairman of the economics committee of the organization, left a warning relating to growing “populism and protectionism” even while the metal had seen the cyclical upturn “broadening and firming” through- out 2017, writes Kunal Bose. Narendran, who is also the managing director of Tata Steel, saw for the commodity “the best balance of risks since the 2008 economic crisis.” The concern about protectionism found a trigger in President Donald Trump’s haranguing about drastically remaking American trade. The President’s objective is to take trade actions to shield US industries like steel and aluminium from low-cost imports not only from China and South Korea but also from allies such as European Union and friendly countries like India.

Trump’s plan to secure the future of US steel, which has shrunk over the years in the face of competition and relatively high production cost got a boost when recently the US Commerce Department in a report said the influx of metals of foreign origin posed a risk to national security. The claim, though unsubstantiated, is exactly what Trump is telling his countrymen. In a bipartisan meeting with lawmakers following submission of the report, the President said:“I want to keep prices down but I also want to make sure that we have a steel industry... and we do need that for national defence. If we ever have a conflict, we don’t want to be buying steel from a country we are fighting.” The reference unmistakably is to China and Russia, both suppliers of steel to the US.

As is to be expected, the targeted country China was not found wanting in debunking Trump by saying: “The spectrum of national security is very broad and without a clear definition it could easily be abused.” The Commerce Department report based on section 232 of the US Trade Expansion Act of 1962 offers the President three alternatives to deal with steel imports that expose the US steel producers to tough competition.

By mid-April, Trump will be choosing one of the three options depending on to what length he will be ready to go to curb steel imports. At the same time, the US Administration will not be unaware that putting up high tariff barriers or tight import quotas will not only invite retaliatory actions from China and South Korea but also from countries and regional groups such as European Union, which stand to suffer collateral damage. The 1962 Act under which the Commerce Depart- ment carried out the enquiry has not been invoked since 2001.  

What Trump finally does with imports will prove to be a defining moment for the world steel industry. He could opt for a broad 24% tariff on all steel imports. Or he could slap a 53% tariff on all steel products from 12 countries, including China, South Korea, Brazil, India and Vietnam. If this option is exercised, then all other countries will find their steel exports limited to the 2017 level. Yet another proposal entailing no new tariffs will enjoin on steel exporting countries to restrict their sales in the US to around two-thirds of last year’s level.

Many wonder why should there be so much carping in the US about imports from China when less than 1% of the country’s steel production finds its way into the world’s largest economy! So China is not the top country, not even among the top ten from where steel comes to the US. Following imposition of trade penalties by previous Administrations, China is sending much less steel to the US directly than in the past. But a good portion of the finished metal that comes to the US fromVietnam and South Korea originate in China as unfinished steel products.

The US point of concern is not only the amount of steel that directly comes from China. It also believes that the quantity of steel that China, which has close to 50% share of global production is exporting annually led to price collapse not long ago in the past spelling doom for many producers in the US and EU. The over four- year bearish market for steel that mercifully came to an end two years ago was the reason for large- scale capacity shutting in major steelmaking countries, restructur- ing of business by the likes of Tata Steel Europe and ThyssenKrupp and bank credit to steel groups turning into non-performing assets as is seen on a big scale in India.

Canada tops the list of countries from where the US imports steel with a 16% share followed by Brazil (13%), South Korea (10%), Russia (9%) and Mexico (9%). Expect some retaliatory trade actions by China, South Korea and EU if the US decides to put unreasonable trade barriers on steel imports. At the same time, the Chinese economy being heavily export- dependent, Beijing will be wary of any further escalation of trade disputes with the US. So to express it unhappiness about the possible steel trade restriction moves by the US, Beijing’s retaliatory actions will be targeted at agricultural goods such soybeans, for which China is the US’ largest export market, sorghum and animal feed. In the meantime, China as usual is keeping the rest of the world guessing as to how much steel it will be making this year after it lifted production by 5% in 2017 to 831.7mt (million tonnes) and what quantity it will sell in the world market. Metal Bulletin Research expects some rise in Chinese steel production in 2018. This is to leave the country with greater exportable surplus for exports in the context of WSA forecast that “the outlook for China’s steel demand in 2018 will remain subdued, showing no growth over 2017 as the government resumes and strengthens its efforts on economic rebalancing and environmental protection.” But global steel demand excluding China will register a growth of 3% to 882.4mt in 2018 which will work out to a modest world demand rise of 26mt to 1.648bn tonnes.

Every Chinese move concerning steel comes for close scrutiny by producers in other countries because the volume China will export will have a bearing on steel prices. But the impact of Chinese exports on prices in a year will be moderate if the growth in steel demand in the rest of the world stays ahead of any incremental shipments of steel made in China. Most analysts believe that if Chinese apparent domestic demand remains subdued in a situation of further improvement in market conditions outside China, then, according to Metal Bulletin, Chinese exports could rise to 80.9m tonnes this year from 72.9m tonnes in 2017.

Improvement in world steel demand and in its wake prices have been triggered largely by cyclical factors rather than structural. For one, the world remains beset with surplus capacity in excess of 600mt, most of it in China. Capacity utilization has remained around 70%. Narendran has sounded a note of caution: “The lack of a strong growth engine to replace China and a long-term decline in steel intensity due to technological and environmental factors will continue to weigh on steel demand in the future.”