China Overproducing. In an environment of global overcapacity, Chinese steelmakers have been last to reduce production, continuing to make steel at a breakneck pace despite a slowing economy. As a result Chinese steel prices have plunged 13% in the past three months, while exports have risen 31%.
Beijing Speaks. Finally last Thursday,Beijing broke its silence saying that steelmakers need to “curb production and eliminate backwards capacity due to structural problems and retreating market demand.” Tonight the other shoe has dropped, as Beijing is now leaking to the Chinese press that they are reviewing increasing export tax rebates on steel, for the first time since June 2009, particularly focusing on silicon steel and plate, although later news reports have suggested galvanized sheet and oil pipe could be “on the list.”
Praise/Scold – An Industrial Moral Hazard. NowBeijing’s plan is revealed; clearly the quid-pro-quo for the swathe of production cut announcements we’ve seen in the past week is now being paid for with export tax rebates – subsidies for exporting – in what is most probably a textbook example of state capitalism turned to crony capitalism.
Outlook; Europe, US, Latin America Will Respond – Loudly. Ultimately, we suspect the Chinese will be very limited in their ability to subsidize their steel exports as it’s well known that China is high cost and would likely lose any trade case filed by any government in the world. However, in the short run, any increase in rebates would ramp up exports from China, and create disincentive for the Chinese sector to keep production down. While it’s premature to make any particular assessments, clearly the risk of more dumped/subsidized steel from China is enhanced by these remarks – and steel buyers in the West may react to an increased risk of Chinese exports by deferring their own purchases.
