Why the world needs to cut back on production capacity of steel plants

China's contention that the goal of curbing overcapacity in steel has been achieved is only partially true and doesn't bode well for India

China was the only voice of dissonance at the recent Tokyo conclave of Global Forum on Steel Excess Capacity (GFSEC), where it remained inflexible in its demand for its dissolution. Beijing’s stand is based on the specious ground that in the three years since the constitution of GFSEC, the Chinese steel industry has undergone some radical transformation and the goal of curbing overcapacity that periodically causes global steel prices to fall, eroding the margins of steelmakers everywhere, is largely achieved.

One doesn’t have to look beyond China, which alone makes more than half the world’s steel, for an appreciation of how badly the industry is now faring.

Commodities insight provider Platts says rebar margins in China during July-September quarter were sharply down to $29 a tonne from $153 a tonne in the same period of 2018. To go by World Steel Association (WSA) statistics and its short range outlook published in October, Chinese steel demand, particularly from the construction sector, has remained at a fairly high level since last year. China, according to the WSA, is likely to end 2019 with steel use of 900.1 million tonnes (mt), a rise of 7.8 per cent over last year’s 835 mt when demand growth was 7.9 per cent. But WSA forecast that steel demand growth in China will recede to just 1 per cent to 909 mt in 2000 is causing concern to the rest of the world industry, including ours, since crude steel production in that country continues to grow rapidly.

In the first nine months till September, China’s steel production was up 8.4 per cent to 748 mt from 691 mt in the same period of last year. The point of concern of Indian industry officials is, the supply there is already in excess of demand. Baneful consequences of overcapacity in the world’s largest producing country would already have been visible in the form of exports of low-cost steel products—made possible by large addition of technologically advanced capacity and hidden subsidy— had it not been for the consumption strength displayed by the property construction sector.

While this is so, experts believe demand for steel from the construction sector is due to fall next year. At the same time, signs of recovery of the manufacturing sector, specially the automobile industry are still not visible. For now, China’s steel exports are down 5 per cent to 50.3 mt in the first three quarters of 2019. But it may not be long before the country emerges as an aggressive seller of steel products in the world market, either directly or via south-east Asian countries. Trade tensions with the US and the European Union will lead China to target countries such as India where the use of the metal is to register a growth of 5 to 6 per cent in spite of economic downturn to leave its surplus steel.

Our steel minister Dharmendra Pradhan delivered a warning at the GFSEC meeting that unless “suitable corrective measures continue to be taken,” the industry might once again lapse into a crisis, created in no small way by excess capacity. This is rightly seen by many as a counterpoint to Chinese argument that the forum having achieved its “mission” should be dissolved by year-end. Why GFSEC remains relevant is aptly summed up by Pradhan: “The forum has in a unique way enabled information sharing among steel producing countries. This in turn is enabling formulation of policies for improvement in working of the global steel industry. Members’ willingness to exchange data on steel capacity and all the direct and indirect support for steel is benefiting the industry as a whole.”

China’s strident opposition to extend the term of GSEC beyond 2019 contradicts ground reality. It is no one’s case that the industry, more relevantly in China because of its gargantuan capacity has not undergone any transformation since the 2015 crisis, when global excess capacity at 700 mt was at its peak. That is now down to 400 mt. But this is still nearly four times India’s 2018 steel production of 106 mt. Whenever steel prices are at a level that threatens the viability of the industry, the accusing finger is invariably pointed at China. This is because any time the Chinese industry faces excess production it leaves the surplus in the world market at prices proving injurious to steelmakers in other places. For example, China’s record exports of 112 mt in 2015, which was more than what Japan, then the world’s second largest producer made that year, invited strong protests from steelmakers in the US and EU, blaming burgeoning overseas shipments from the Asian nation for the deep steel crisis.

Global outrage left China with no alternative but to rein in steel exports since 2015. Even then, the country exported 68.8 mt last year. Where, however, China can claim credit is in its carrying out a multi-year programme of shuttering old, inefficient and polluting steelmaking capacity. This, however, does not mean that the country is ridding itself of excess capacity. Beijing is allowing new capacity creation on a replacement basis, that is, a new unit in lieu of a pulled down plant. As a result, says a Platts report, the country will have its net crude steel capacity expanded by 37.65 mt a year over 2019-23, of which as much as 34.88 mt will be commissioned this year itself. New capacity building in place of the old will make China the owner of a 1.2 billion-tonne steel industry. The new Chinese mills being embedded with most modern technologies are capable to make a lot more steel than their nameplate capacity.

India, which recently replaced Japan as the second largest steel producer, is on a massive capacity building drive. In the next one decade, the country will strive to commission 160 mt capacity to own a 300 mt industry. Pradhan gave assurances to GSFEC delegates that like in the past, the country would not contribute to global overcapacity as the new planned capacity was aimed at raising our per capita steel use from 72 kg to 160 kg by 2030-31, which is, however, much lower than the present world per capita average of 212 kg. No doubt, if the country is able to spend $1.4 trillion in infrastructure development in the next five years, then the steel intensity of our economy will get a boost.