The Iron-y of the Steel industry.

On April 1st 2016 an article appeared on The Telegraph in which China raised its steel import tariffs from 14% to 46% from the European Union (EU), South Korea and Japan alleging that it had suffered “substantial damage” from their trading abuses. Unlike the U.S., which imposed recently a 256% tariff, the U.K. cannot implement on its own a similar measure due to restrictions of the EU trade laws that allow a 13% tariff.

tata stock 2

This measure comes in perfect timing to kill off the remaining steel factories left in the EU zone which have been struggling to revert a continual strain of losses from the previous 5 years, and with special notoriety, U.K’s biggest steel producer Tata Steel at Port Talbot, one of the oldest welsh industries, will pull out its operations due to imports of Chinese steel, high energy costs and weak demand.

This tariff coincidently comes right after British prime minister, David Cameron confronted the Chinese president Xi Jinping at a meeting in Washington, pleading for action to slow the flood of Chinese steel exports reaching Europe. Although this measure will not impact directly the U.K.’s steel industry, it may be a concern on a wider market effect.

This implemented measure does not have a trade explanation since china is the biggest steel producer of the world, It seems that recrimination, as small as it may be, was the desired effect.

china production

world steel production.

Beginning of a Trade War.

While this particular tariff is going to have virtually no impact on European steel, mainly because the biggest steel producer is China, this is more of a warning shot on any future tariff implemented on their products will be met with equal recrimination.

The big picture of course is that China has been accused of dumping their steel for below what they sell it for in their home market, and that has destroyed British steel. Now the British government is trying to find a way to keep from losing 50,000 jobs from their steel industry.

Unfortunately, this is how trade wars start: a little bit of eye for an eye treatment soon descends into an orgy of recriminations and counteractions thus diminishing the wealth of all countries involved. Taking the protectionist side will not necessarily produce the best results in this case.

Problem spreading over the Eurozone:

industry com 2

Over the past year, stock prices of european companies have had difficulties with the rising imports of steel from developing countries. Big steel mills, such as Acerinox (Spain), Aperam (Holland) and Thyssenkrupp (Germany) have had a rough period and bad fiscal results. This problem has to be tackled not separately by the U.K. but get involved the whole EU to determine if China is engaging in the unlawful practice of dumping and if so, what measures the block should take.

European steel asosiation (EUROFER) “Competition Guidelines” link:
http://www.eurofer.org/About%20us/Eurofer%20Portrait.fhtml

European commission “The EU steel industry report” link:
http://ec.europa.eu/growth/sectors/raw-materials/industries/metals/steel/index_en.htm

Evans-Prichard, A. April 1st, 2016 “Defiant China slaps steel tariffs on Britain as trade war looms” The Telegraph.
http://www.telegraph.co.uk/business/2016/04/01/defiant-china-slaps-steel-tariffs-on-britain-as-trade-war-looms/

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2 Responses to The Iron-y of the Steel industry.

  1. Chris Mui says:

    This blog seems to suggest that the issue is within the countries imposing tariffs. These protectionist policies are viewed as self preservation moves by the country. These moves are seen as detrimental to global output and overall selfish by onlookers across the globe. This thought process does not encompass the entirety of the situation.

    I believe that these tariffs are actually market corrections for the over supply of iron ore. Iron ore is a necessary input to create steel. Iron ore is currently seeing one of its largest increases in global supply. This is due to the projected global demand for iron ore that is based off of China’s expected growth. However, as we have all seen, China’s projected growth has been cut back and its ability to continue growing at previously projected rates have declined. With this decline, demand for steel has decreased which has in turn decreased demand for iron ore. Regardless, of the decrease in demand for these products, supply is still extremely large. This core issue of iron ore oversupply is the real culprit. Even though it is likely best for global output to reduce tariffs, a country is forced to impose tariffs if they seek to best protect their citizens from global shocks.

  2. danchenli says:

    I think this is an interesting article about world steel industry, especially between Europe and China. I also wrote my blog related to steel trade and saw the potential risk for trade war. This article is like a follow-up on the latest news that China did fight back using tariff more like a gesture than actual effective action to make a point. I agree with your point about this may be the start for trade war. With more protectionist trade measures introduced worldwide, there are worries that protectionism has been greater since 2012, putting globalization under threat, and trade war is the last thing countries want to engage, so I think both UK and China need to take careful thoughts about how things are going to evolve next.

    As for China, I definitely think they should restructure the steel industry with market demand and decrease the total output, and I always thought with the oversupply and pressure from other countries, such as UK and other EU countries, who blame China for dumping its steel product, there would not be any possibility for China to reopen new mills. However, now I realize there are lots more issue for China to consider including speculative investors, volatile domestic steel price, and tax revenue obstacles. The good sign is the authority has realized the problem in the steel industry and has taken action to solve it. I think a complete structural reform is necessary, which may take about five to ten years to see the result.

    In terms of Europe countries, it is worth mentioning that although most EU countries were applying to remove the “lesser duty role”, which is the policy currently preventing them from adding more tariff on China’s steel exports, UK decided to not pursue the removal of the policy, because UK believes adding more tariff will hurt other downstream steel businesses by increasing raw material costs, so I think countries also need to consider the bigger picture, not just one industry, when considering trade barriers or trade war.

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