Steel Authority of India Chairman P K Singh injects a massive dose of reality as he says the continuing crisis in the world steel industry has got much to do with unmanageable surplus capacity built principally by China in the past decade and a half. As a consequence of its 300 million tonnes (mt) excess capacity in a situation of falling domestic demand, China's compulsion to export has grown. Low priced Chinese exports made possible by subsidies provided at different government levels have brought many steel mills, particularly in relatively high cost centres in the world to their knees. No other country has suffered as much as Britain where operations of Tata Steel Europe remain loss making. It also has a deficit of 700 million pound in its UK pension scheme. It reportedly invested 4 billion pound in the UK steel business in the past eight years. While nothing has come out of that, its 4.9 mt mill at Port Talbot in south Wales will need further investment of 2 billion pound to become viable. The near- to medium-term steel outlook looking difficult, it will not be easy for Tata Steel to find a party ready to grasp the nettle that Port Talbot is all about.
Tata Steel is in talks with ThyssenKrupp of Germany for a likely European steelmaking joint venture. A tie-up between two European steel majors leading to capacity consolidation in a meaningful way is what Europe will be better off with. European steelmakers association Eurofer says since 2007, the year when Tata Steel acquired Anglo-Dutch group Corus, the region's steel use is down 25 per cent. But, Tata Steel's burden of UK operations is likely to stand in the way of a JV with ThyssenKrupp. No wonder, then, concern over capacity surplus is finding growing resonance at all places, including Beijing, which is blamed for world steel crisis refusing to go away. Perhaps, no one in the past has told China as bluntly as European Commission President Jean-Claude Juncker that if the country wants to trade freely with others, it must do a decent job of eliminating surplus capacity responsible for steel dumping. "I don't want to dramatise the issue... but there is a clear link between the steel overcapacity of China and the market economy status for China."
Recalling the painful adjustment the European steel industry went through in the 1970s and the 1980s involving permanent mill closures that caused losses of "tens of thousands of jobs", Juncker said China must start eliminating surplus capacity braving job losses and social discontent. In an obvious reference to China, the finance ministers of G20 have said "excess capacity in steel... is a global issue which requires collective responses. We also recognise that subsidies and other types of support from governments or government sponsored institutions can cause market distortions and contribute to global excess capacity and therefore, require attention."
World pressure to trim capacity and stop subsidising steel products exports is intensifying when the Chinese economic growth is slowing. Its exports of goods and services fell 4.8 per cent in June compared to a year ago amid a raft of uncertainties facing the world economy. June imports, too, declined 8.4 per cent. Admitting that growth might have slowed to 6.6 per cent in the second quarter of 2016 compared with 6.7 per cent in the first, Chinese officials say the situation is "grim and complex".
In this kind of economic stress, it is only to be expected that Beijing will deal with provincial governments firmly to ensure yearly steel and coal capacity reduction targets given to them are honoured. China's planning body National Development and Reform Commission has mandated steel capacity reduction of 150 mt by 2020, of which 45 mt must go this year. In an ambitious restructuring programme for coal over the next five years, Beijing wants to eliminate 500 mt mining capacity and "consolidate a further 500 mt capacity". Final job losses in the two sectors will be 1.8 million out of total employment of 12 million. For rehabilitation and new skill development for job losers, Beijing will be providing 100 billion yuan ($15.10 billion) over the next two years. In an attempt to carry conviction with other steel and coal producing countries, Beijing says provincial governments that fail to fulfil capacity cut targets will be "seriously punished". The world will be watching.
