Steeling Trade: Trade War Prospects & Implications

BMI View: The re has been a rising threat of international protectionist policie s in recent months , particularly in industries that have struggled to gain traction since the financial crisis . Chin a and the EU ha ve been at the centre of such controversy and should protectioni st policies proliferate, this would have a detrimental effect on global economic growth over the long run. Here we focus on the steel market, which has been a key battleground in this nascent conflict .

T he slew of trade disputes over steel products has continue d to intensify in recent months as both the EU and China suffer the knock-on implications of a sharp economic slowdown. As battle lines are drawn between two of the world's largest economic powers, we study the implications of the e scalating trade tensions between the different side s , most notably China and Europe .

Recent Events

  • EU policy makers are adopting an increasingly muscular approach to what they view as unfair trade practices from Chinese pro ducers across multiple sectors, such as steel, telecoms and solar.

  • The EU recommends slapping imports of Chinese coated steel with countervailing duties of up to 50%.

  • The US Commerce Department has launched anti-dumping probes into steel wire from China, Mexico and Thailand.

  • China begun an anti - dumping investigation on certain high-performance alloy-steel seamless tubes from the EU, Japan and the US.

  • The o wner of ArcerlorMittal , the world's largest steel producer, urged Europe to embrace protectionism and erect trade barriers to curb China from flooding the world with cheap goods.

As evidenced by events discussed above , a n increasing number of countries are turning the screw on China over its alleged dum ping of steel products abroad. W e believe there is some legitimacy to this claim given the production glut and parlous state of many Chinese steel mills in recent years. Masked by the de livery of perpetual government support, a n overwhelming number of domestic steelmakers i n China are battling to survive amidst the unsustainable mix of massive o vercapacity, depressed margins and sluggish demand in the steel industry.

Rising Again
China - Exports of Steel Products (kt)

Exports of steel provide an opportunity to alleviate some of this domestic overcapacity . Subsequently, this has encouraged many of the cash-strapped Chinese steel mills such as Baoshan Iron & Steel to push their shipments towards the seaborne market. W e expect this trend to gather steam over the coming quarters as the inherent unsustainability of China's 'growth-at-all-costs' model surrender s to structural headwinds in the latter part of the year. The imminent economic slowdown of the world's largest consumer of industrial metals w ill have significant i mplications for these commodity prices given that i n most cases, China's consumption now accounts for 40-50% of global consumption. Furthermore, with Chinese Premier Li Keqiang looking to adopt a less interventionist stance in the domestic economy, the steel sector will not be able to count on the elevated level of government support of recent years .

China's Outperformance Diminishing
Real GDP Growth Forecasts (%) - Spread of China Over US

Accusations To Heat Up

We believe further protectionist measures by Europe, in the form of punitive duties on imported goods from China, could be on the cards over the coming quarters. With protracted debt woes and sluggish economic growth in the eurozone, many politicians and trade unions are likely to step up accusations against trade practices by China in a bid to support the ir domestic steel industries and arrest significant concerns over unemployment. The austerity measures embarked on by many European states will further escalate trade ten sions between Europe and China.

Global Steel Glut Hits Margins
Global - Select Steel Producers (EBITDA Margin %)

No Winner In Metal Trade War

In our view, the protectionist thinking that so many countries have embraced in recent years is a clear disregard of free market economics and is set to benefit only the special interests of certain groups. By artificially propping up many of the loss-making corporations for the sake of political expediency, government intervention is circumventing the process of consolidation in an oversupplied industry . While tariffs may safeguard the jobs of domestic steelmakers, this form of support often comes at the expense of the wider economy . Specifically, the benefit of low steel prices to the manufacturing sector will be diluted by steel import tariffs and promotion of higher cost domestic steel production. Steel trade protectionism would protect jobs in one sector (steel) at the possible expense of job creation in other sectors (manufacturing).

Germany Has Much To Lose
Eurozone - Trade Statistics With China, US$mn (2011)

The cost of these tariffs will not only be borne by companies that import steel, but also , adversely impact the wider economy given the metal's prevalent usage across a wide range of industries, such as the autos and manufacturing sector. For instance, the Institute of International Economics (IIE) in Washington, DC, estimated that the protectionist policies practised by the Bush ad ministration in March 2002 cost steel consumers around US$600mn in lost profits from higher prices and 26,000 lost jobs. In contrast, the benefit to American steel firms has been only US$240mn, mostly from a 3.3% rise in average steel prices with some 5,000 jobs saved.

Of most concern , the imposition of tariffs in one sector could jeopardise bilateral trade with China and ignite retaliatory moves from the country in other sectors. Indeed, we take solace from the fact that Germany - China's largest trading partner and the economic superpower in the bloc - has pledged to resolve the trade disputes between Brussels and Beijing over Chinese telecom products and solar panels. .

This article is tagged to:
Sector: Mining, Metals
Geography: Global

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