Shift in China Trade Policy Could Accelerate Western Steelmakers’ Slump

The steel business faces its biggest hurdle in 60 years with some analysts predicting double digit production cuts in 2009. Now, a sudden change in China trade policy may spell even more trouble for Western steelmakers, as Beijing is currently considering measures to shore up its ailing steel industry with new export policies.

According to World Steel Dynamics, a U.S. steel consulting firm, steel production could fall next year by 13.9% compared with this year. This downturn comes after a long period of growth in the steel industry. In fact, output has grown every year since 1998 - soaring from 777 million metric tons a decade ago to 1.34 billion metric tons in 2007.

The catalyst behind the expansion has been a robust world economy and a steep rise in demand in China - by far the world’s biggest steel producing and consuming nation, accounting for more than a third of global steel output.
But the sector has been among those worst hit by this year’s financial storms, with share prices in many steel companies having fallen by more than two-thirds since the middle of 2008.

“The reduction in demand we’ve seen in steel goes beyond typical cyclical downturns given the level of distress in global financial markets and tight credit conditions,” Carol Cowan, a U.S.-based analyst at Moody’s Corp.(MCO)credit rating agency, told the Financial Times.

Steel companies’ share prices have been hit hard. Severstal OAO, Russia’s biggest steelmaker, has seen its shares fall almost 90% since July, ArcelorMittal (MT) has dropped more than 70 per cent; and United States Steel Corp. (X), the United States’ biggest steel company is down 79% over the same period.
Meanwhile, China’s steel industry, the world’s largest, is sitting on a stockpile of 63 million metric tons, or about 13% of annual production. Baosteel Group Corp. General Manager He Wenbo said in November that his company was facing the “most difficult” period since it was founded 30 years ago.

But China is making noise about a shift in trade policy meant to rekindle its steel mills and keep its economy humming. The government is considering measures, including buying unsold inventory and raising export rebates, to help steelmakers weather the slowdown, Minister of Industry and Information Li Yizhong told Bloomberg News on Dec. 12.

That represents a dangerous shift in policy that could hinder international trade, according to Myron Brilliant, vice president for Asia at the U.S. Chamber of Commerce in Washington. The economic crisis has prompted China to turn back to “export-oriented policies that could lead to an increase in the trade imbalance” and new tension with the United States.

Treasury Secretary Henry Paulson has spent more than two years smoothing over U.S.-China trade relations. Part of those efforts focused on the value of China’s currency, the yuan, to redress what U.S. officials saw as an unfair price advantage for Chinese products. The yuan rose 21% versus the dollar from 2005, but its steady rise stalled in July, and has barely budged since.

Before leaving for trade talks in Beijing this month, Paulson told business representatives his biggest concern was that China would revise policy and reverse moves it had made during the past year to cut aid to exporters and stimulate domestic consumption.

China’s five-year plan through 2010 aims to rebalance growth away from exports and increase domestic consumption, but so far it has met with dismal results. Household consumption declined to slightly more than 35% of China’s gross domestic product (GDP) last year from 45% in 1993. By comparison, consumer spending represents almost 70% of the U.S. economy.

“What separates China from the rest of the world is its incredibly low level of consumption relative to GDP,” Brad Setser, a fellow at the Council on Foreign Relations in Washington, told Bloomberg News. “What can China do that would most directly help the world economy during a period of very severe weakness? Get its consumption back up to 40% of GDP.”

A shift in Chinese policy is bound to meet with resistance in U.S. business circles, especially among steelmakers. Lawyers representing Nucor Corp, the second-largest U.S. steelmaker, and smaller steel pipe makers say they are considering new trade complaints against China.

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