Battle Lines Drawn As Self Interest Rules
With regard to the health of the world economy, a popular saying over many decades has been: “When America sneezes, the rest of the world catches a cold”. Nowadays, China´s influence over global steel is so enormous that any sign of ill-health in China´s steel consumption spells bad news for steel markets everywhere. The proof of which has been seen in the past two years when a collapse in the Chinese property market has prompted a significant fall-off in domestic steel demand. This in turn has forced Chinese manufacturers to offer their surplus material to the export market at reduced prices. In this year alone, Chinese exports have increased by almost 30% on last year´s level and are presently at an eight-year high. The Shanghai-based consultancy, Mysteel, anticipates exports will reach 100 million metric tonnes this year: the third highest ever. Not surprisingly, though not always accurately, this has led to claims by rival manufacturers in other countries that China is breaking World Trade
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Organisation rules by illegally dumping its subsidised steel on the open market. Falsehoods, misunderstandings and the manipulation of public opinion are all in rich supply. Of course, if China´s economy were to improve, much of this angst would quickly disappear. But the opposite is happening. Despite numerous central government initiatives to stimulate growth, the world´s second-largest economy remains weak and stagnant. As an example, in August the Purchasing Managers’ Index for China’s steel industry hit 40.4. That was down from 42.5 in July and was the third on-month decline, according to the official index compiler, CFLP Steel Logistics Professional Committee (CSLPC). Additionally, the sub-index in August of new steel orders stood at 38.5, down from 40.3 the month before. The CSLPC characterised August as being a month in which domestic steel demand weakened further, steel production decreased, steel stocks at mills mounted, while raw materials prices stayed at low levels, and finished steel prices hit bottom before bouncing back a bit.
By significantly increasing its steel exports during 2024, China has acted in completely- understandable, self interest. However, this has set into motion retaliatory action by numerous other countries who of course have their own self interest agenda. Commencing in October, Canada will impose a 25% tariff on imported steel and aluminium from China; plus a 100% tariff on imports of Chinese electric vehicles. In doing so, Canada will merely be following the lead set by the United States and the European Union. The China Iron and Steel Association has said the Canadian government’s unilateral decision to impose tariffs on Chinese steel products without any investigation undermines the multilateral trading system based on WTO rules and has an adverse impact on global steel trade and industry development. China’s Ministry of Commerce has said it will take decisive measures against Canada, including plans to initiate dispute settlement proceedings at the WTO and the launch of an anti-discriminatory probe. In this climate of protectionism and retribution, China is not alone in being fairly or unfairly targeted. Last week, the US presidential hopeful, Kamala Harris, said she is against the planned acquisition of US Steel by Nippon Steel, Japan’s largest steelmaker. Last December, the Japanese company launched a $14.1 billion takeover bid for the American steelmaking icon, claiming the merger would create the world’s third-largest steelmaker by volume. Shareholders have backed the acquisition. However, US Steel is headquartered in Pittsburgh in Pennsylvania, a vital state in the November 5 presidential elections. Unsurprisingly, in pursuit of electoral votes more so than company viability, Harris has said: “It is vital for our nation to maintain strong American steel companies….and I will always have the back of America’s steelworkers and all of America’s workers.” Availing itself of the opportunity to flex its union muscles, United Steelworkers International has also spoken against the takeover.
The combined malaise of a cooling world economy and the under-cutting of steel prices has been keenly felt in Germany, Europe´s largest economy. The country struggled to achieve growth of 0.2% in Q1 of 2024, and the latest economic data indicates a 0.1% decline in Q2 GDP. The problem is the steel-intensive construction sector which accounts for around a fifth of the country’s economic output. At the end of July, new construction starts in Germany were down by 26% year-to-date. The construction sector has now been in contraction for 28 months.
Finally, within the landscape of global ill-will, it´s reassuring to observe at least some international agreement. The Japanese steelmakers, Nippon Steel and JFE Steel have signed with Australian coking coal supplier Whitehaven Coal to acquire a combined 30% interest in the Blackwater coal mine as well as signing a long-term coal offtake agreement. Blackwater is a large scale open-pit coal mine located in the Bowen Basin in Central Queensland. The run-of-mine coal production has been around 12-13 million metric tonnes per year in recent times with both hard coking coal and semi-soft coking coal products. It ships coking coal to Asian customers through the RG Tanna Terminal north of Gladstone.
Nippon Steel and JFE Steel estimate they´ll spend $720 million and $360m for 20% and 10% stakes in Blackwater, respectively. The transactions are expected to be completed in the early part of 2025. The mine will be owned by the three counterparties via an unincorporated joint venture. It will be managed by Whitehaven Coal.