HANDELSBLATT EXCLUSIVE Study: China Failed to Reduce Excess Steel Capacity in 2016

Despite its claims to the contrary, Beijing made no significant progress in reducing excess steel capacity last year, according to two studies. Struggling European steel producers will likely face pressure from China for years to come.
Quelle: dpa
Chinese workers labor next to molten steel at a steel plant of Dongbei Special Steel Group in Dalian city, northeast China's Liaoning province.
(Source: dpa)

Chinese government efforts to reduce excess steel capacity made virtually no progress in 2016, a bad omen for European producers that have been undercut by cheap Chinese exports.

Chinese steel production actually increased by 36.5 million tons last year, according to a study by the environmental group Greenpeace and the consulting firm Custeel, which was seen by Handelsblatt before publication.

"The fact that Chinese raw steel production increased in 2016 reflects that the consolidation of the Chinese steel industry is moving forward very haltingly," Hans Jürgen Kerkhoff, president of the German Steel Federation, told Handelsblatt.

The government cannot afford to kill off a lot of companies. Otherwise there would be mass unemployment here. Chinese steelworker

The German Steel Federation found that China's excess steel production capacity stood at 364 million tons in 2016, about the same level as the year prior.

“Overcapacity in the Chinese steel industry is expected to lie clearly above the 300-million-ton mark through 2020,” said a spokesman for ArcelorMittal, the world's largest steel producer.

Last month, Chinese Premier Li Keqiang claimed in Bloomberg Businessweek that Beijing had cut 65 million tons of steel production capacity in 2016. Chinese President Xi Jinping told the World Economic Forum in Davos that Beijing would continue to reduce excess steel capacity.

Beijing is in the midst of a broader effort to restructure the Chinese economy by trimming bloated state enterprises in the steel and coal sectors that are largely divorced from the market.

But the Chinese government's claims about its consolidation efforts are misleading. Lauri Myllyvirta, a Greenpeace activist, said Beijing has simply closed plants that were no longer operational anyways.

A worker in Tangshan, China's steel capital, said the government simply cannot afford to cut too deep.

"Of course some factories will be closed," said the worker, who declined to be named. "But the government cannot afford to kill off a lot of companies. Otherwise there would be mass unemployment here."

Some provinces have adopted a broad interpretation of Beijing's directives and have actually reopened previously moribund plants, Ms. Myllyvirta said.

"The capacity that's found in the market has remained unchanged," said Mr. Kerkhoff with the German Steel Federation.

That's bad news for the European steel industry, which has hemorrhaged red ink as cheap Chinese overcapacity has flooded the market.

We need a comprehensive solution for Chinese overcapacity as well as the subsidies that Beijing guarantees to its steel industry. Aditya Mittal, CFO, ArcelorMittal

The industry successfully lobbied Brussels to impose anti-dumping measures, which have provided some relief. Prices have risen and Chinese steel exports to Europe declined from 7.2 million tons in 2015 to 6.1 million tons in 2016

But European steel executives, such as Wolfgang Eder of Austria's Voestalpine, acknowledge that intervention by Brussels is no silver bullet to the problem of overcapacity.

"I make no bones about the fact that I am no friend of anti-dumping measures" Mr. Eder said. "As appropriate as they may be on a case-by-case basis, they never represent a long-term solution."

Total steel exports to Europe have actually increased 11 percent even as Chinese exports to the continent have declined. The former Soviet states, Turkey and other Asian countries have stepped in where Beijing has been pushed back by Brussels.

Even with the anti-dumping measures in place, European steelmakers continue to struggle. ThyssenKrupp's steel unit saw its earnings before tax and interest drop from €50 million to €25 million in the first quarter of 2016 due to a perfect storm of low prices and the rising cost of coal and iron.

This has put Thyssen's steel unit in a financial pinch. The unit cannot pass rising costs on to its customers for the time being due to long-term delivery contracts, said Guido Kerkhoff, the company's chief financial officer.

Aditya Mittal, the chief financial officer at ArcelorMittal, said the industry needs to find a solution that gets to the heart of the problem.

"We need a comprehensive solution for Chinese overcapacity as well as the subsidies that Beijing guarantees to its steel industry," Mr. Mittal said.

Martin Wocher is an editor with Handelsblatt, focusing on the mechanical engineering and steel industries.  Stephan Scheuer is Handelsblatt's China correspondent, based in Beijing.To contact the authors: [email protected] and [email protected].