OECD Steel Committee: Some Signs of Recovery, But More Work Remains

15 September 2016

Global steelmaking capacity is slated to grow over the next two years, officials from the Organisation for Economic Co-operation and Development’s (OECD) Steel Committee warned last week, just days after a G-20 summit where leaders agreed to set up an international forum to tackle the problem.

The OECD’s Steel Committee aims to provide a platform for fostering transparent, competitive steel markets, seeking to minimise market distortions and facilitate international cooperation through policy solutions.

Along with holding a regular session of their committee on 8 September, the group also held talks the following day involving G-20 members, as part of the initial steps toward establishing the planned Global Forum on Steel Excess Capacity.

Capacity on the rise

A central concern at the OECD meeting last week was that of excess capacity, a challenge that has been plaguing the steel industry since the financial crisis, resulting in a situation where steel supply vastly outpaces demand.

The committee also explored the global steel demand outlook and other aspects of the global steel market situation, the latest developments in trade policies in the steel industry, and progress in steelmaking capacity.

Global steelmaking capacity continues to rise and is “projected to increase by almost 58 million metric tonnes (mmt) in the 2016-18 period, thus reaching 2,425.5 mmt by 2018,” said Risaburo Nezu, Chairman of the OECD Steel Committee, in his statement to participants.

Since the start of the year, while there was a drop in production early on, the “rate of decline has diminished” in recent months, while the outlook for recovery in demand remains dim, Nezu explained. The committee chairman said that demand this year is expected to hit 1.5 billion tonnes – meaning that there will be over 800 mmt of excess capacity as a result.

This prolonged mismatch has led to growing risk for the sector, weakening its viability and efficiency and resulting in mounting trade friction, marked by increases in trade actions by competing producers to protect their domestic industries.

Building on G-20 outcomes

Earlier this month, G-20 leaders at a summit in Hangzhou, China, met to address a series of issues relating to the state of the global economy – including, among other topics, the problem of excess capacity in steel and other industries.

Leaders ultimately included in the final communiqué a recognition of the problem that excess capacity poses for steel markets in the face of slow economic recovery and faltering demand, and that a solution must be global in scope through increased cooperation and information sharing. (See Bridges Weekly, 7 September 2016)

The communiqué called for the formation of a Global Forum on steel excess capacity to encourage adjustments, reporting back to G-20 ministers in 2017 – a decision that was welcomed by the OECD Steel Committee, Nezu said.

The initial discussions for how this forum would operate were held last week in Paris, involving both OECD members and G-20 steel-producing countries. Outside of the establishment of the global forum, the G-20 summit communiqué did not include any additional binding commitments on reducing production.

The G-20 communiqué also says that “subsidies and other types of support from government or government-sponsored institutions can cause market distortions and contribute to global excess capacity and therefore require attention.” 

China in focus

In recent years, China has become a focal point in this debate, as a mammoth producer and consumer of steel that is the source of half of global output. Of the top ten steel producers, five companies are headquartered in China, according to the World Steel Association, totalling between them an output of 177.952 million tonnes in 2015.

China has lately come under fire by other major steel-producing countries for allegedly propping up state-owned factories and potentially selling its steel abroad at prices lower than their normal value. The Asian economy has also faced claims of subsidising new capacity creation or maintaining inefficient facilities in operation and delaying exit in order to protect workers, offset social fallout, and limit the implications for its economy.

 

The high exit barriers have long served to discourage adjustments in capacity, but China has begun to signal a commitment to a change of pace, including promises to cut steel capacity by 45 million tonnes this year, and by 150 million tonnes in total over a five-year period. These reductions are expected to come at the cost of 180,000 jobs for steelworkers.

With lower-priced Chinese steel flooding the market, traditional steel-producing countries like Japan and the United Kingdom have lately struggled to remain competitive.

The OECD has reported 13 cases of permanent factory closures, 13 temporary closures, five production cutbacks, and 33 layoffs taking place at steel facilities between September 2015 and June 2016. Over 60 percent of these closures occurred either in Europe or in the North American Free Trade Agreement (NAFTA) countries – Canada, Mexico, and the US.

Trade measures

In addition, other economies such as the European Union and the US have undertaken various trade remedy investigations to assess whether foreign producers are benefiting from alleged dumping or unfair state aid, and if those practices are hurting domestic industry.

Ahead of the global forum’s launch, the US has confirmed via a White House factsheet that it will work toward “enforcing 160 anti-dumping and countervailing duty orders on steel and steel-related products, tracking US and global steel trade flows, working to address evasion of anti-dumping and countervailing duties and upholding US rights under trade agreements.”

For its part, the EU has undertaken trade remedy actions on over 30 types of steel products. (See Bridges Weekly, 18 February 2016)

In his statement for the OECD Committee, Nezu referred to the trade tensions that have resulted from the struggles in the sector.

“There has been a sharp increase in steel trade actions by governments, while global steel trade remains relatively robust, with world exports of steel having averaged more then 300 mmt per year since 2014,” said Nezu, adding that countries should ensure that such steps are in line with internationally-agreed rules.

ICTSD reporting; “Excess capacity in Chinese economy distorting world markets, says Jack Lew,” THE GUARDIAN, 5 June 2016; “G-20 Says Industrial Overcapacity Has Put Dent in Global Trade,” THE WALL STREET JOURNAL, 10 July 2016; “G20 nations for global forum to address excess steel capacity,” THE HINDU, 5 September 2016; “G20 pledges to tackle global steel gut, quell China tensions,” REUTERS, 5 September 2016; “G20 kicks steel overcapacity can down the road again,” REUTERS, 7 September 2016; “China fights for market economy status,” FINANCIAL TIMES, 9 September 2016; “Tata stops Port Talbot plant sale as talks begin with German steel group,” THE GUARDIAN, 8 July 2016; “Charted: how China turned the global steel industry upside down in 15 years,” QUARTZ, 7 June 2016.

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