Explaining Growth in China

Consequences of Steel Tariffs on the Chinese Steel Industry


Term Paper, 2016

20 Pages, Grade: 1,0


Excerpt

Table of Contents

List of Figures

List of Abbreviations

1 Introduction

2 The Chinese steel industry
2.1 Historical development
2.2 Domestic market and global position
2.3 China’s steel industry export figures
2.4 The development of the global steel price from 2008 to 2016
2.5 Tariffs on Chinese steel exports

3 Consequences
3.1 Influence on the Chinese steel industry
3.2 Future

4 Conclusion

5 References

List of Figures

Figure 1: Total Production of Crude Steel 2008 – 2015 in million MT

Figure 2: Imports and exports of semi-finished and finished steel products in China from 2005 - 2014 based on

Figure 3: World steel trade by area in 2014 in million tons

Figure 4: Steel price from 2008 – 2016 in USD/MT

List of Abbreviations

Abbildung in dieser Leseprobe nicht enthalten

1 Introduction

Since 2014, China is the second largest economy in the world, following the United States of America, comparing the countries’ gross domestic products (The World Bank, 2016a, p. 1). China’s steel industry dominates the global steel market, taking nearly half of the world’s production into account (Pham, 2016). In 2015, the country is the biggest exporter of semi-finished and finished steel products. Latest developments show a lowering and stagnating overall growth in China. This forces higher steel exports and puts pressure on the global steel price, leading to clamours for taxing Chinese steel imports in other countries. The U.S. and European Union (EU) among other countries have already confined tariffs (Rapoza, 2016) on Chinese steel, aiming to protect their local steel industry.

The above-mentioned events, which are currently taking place, are leading to the main research question of this coursework: What are the consequences of steel tariffs on the Chinese steel industry and its development? Coping with this question a deeper look at the Chinese steel industry is needed. First, this paper will outline the history and examine statistics dealing with the global steel market in order to center the growth and structure of the Chinese steel industry. The second part of this paper highlights tariffs, their function and influence on the market in general and especially on the Chinese steel industry. Finally, derived from previously examined facts, the tariffs’ consequences on the industry are discussed concluding with a future outlook.

2 The Chinese steel industry

First, the Chinese economy and steel industry are discussed and the domestic market is analysed as to be able to describe its basic structure and characteristics. Here, the focus lies on the development since China’s entry into the World Trade Organization (WTO) in 2001.

2.1 Historical development

China’s economy is highly driven by so-called “Five-year plans” (FYP) wherein, among others, the country’s economic development is planned on a five-year basis. Since entering the WTO in 2001, China’s GDP has shown constant increasing growth rates until 2007 (The World Bank, 2016b). In this time, exports and investments were focused as to support economic growth resulting in an increasing dependence on exports (Xu, 2016, p. 3). Due to the financial crisis in the U.S. and the European debt crisis, the expected growth rates have been adjusted from 8.0 to 7.5 percent in 2012 (Xu, 2016, p. 1) and again from 7.0 to 6.5 percent in March 2016 (Magnier, 2016). Fundamental changes during the twelfth FYP (2011-2015) were aimed to transform the investment- and export-driven economy into to a consumption-driven domestic one (Xu, 2016, p. 7). The thirteenth FYP (2016-2020) further declares in particular a renovation of inefficient industries or those with overcapacity (Bourdeau, 2016).

Equally, the steel industry in China has changed and grown extensively. Since “… a positive economic growth rate is accompanied by a growth rate of crude steel1 production in the same sense …” (Dobrotă & Căruntu, 2013, p. 428). In 2001, the steel industry mainly consisted of state-owned enterprises (STO) dealing with problems such as over-employment, poor management, low efficiency and social cost burdens (Brizendine & Oliver, 2001, p. 22). The industry was highly fractured (Woetzel, 2001, p. 95) and without governmental protection and support not competitive on the global market. However, China had already become the largest producer of steel before joining the WTO (Brizendine & Oliver, 2001).

To improve the industry’s competiveness the National Development and Reform Commission (NDRC) specified the “Development Policies for the Iron and Steel Industry”2 in 2005. This governmental initiative’s main task is to consolidate and restructure the industry by mergers and acquisitions (M&As), partnerships and cross holding of shares (KPMG, 2009, p. 20) as to particularly reduce the numerous domestic steel producers (Bonney & Leach, 2009, p. 42). In the long-term, this consolidation phase is to result in two market heavy weights and ten steel groups to compete against overseas industries (KPMG, 2009, p. 20). In 2010, the top ten Chinese steel groups had already acquired 48 percent of the total output in China (KPMG, 2011a, p. 3).

The twelfth FYP emphasizes the M&A consolidation, aiming to further improve technology, relocate the industry to coastal areas but also to restrict production capacities in order to prevent overproduction in an however highly competitive global market (ibid., p. 1). Resulting from the decreasing international steel price China has already shut down 90 million MT of capacity (Engineering News-Record, 2016).

2.2 Domestic market and global position

China’s large-scale steel industry was only able to grow to today’s extent by enduring high demand. The domestic market had always been the main driver and consumer of steel, based on high demands typically in the sectors of:

- Automotive
- Construction
- Manufacturing
- Power generation
- Shipping

There is a strong interconnection between the steel industry as a supplier and the above named industries as market demand. This means stagnating and decreasing growth rates on the demand side result in a likewise move of the supply curve. (MarketLine, 2015, p. 14).

Abbildung in dieser Leseprobe nicht enthalten

Figure 1: Total Production of Crude Steel 2008 – 2015 in million MT (World Steel Association, 2016b)

Figure 1 shows the global annual crude steel production in million MT, comparing the development of China’s steel production in particular with the global production from 2008 to 2015. In 2015 1,622.8 million MT of crude steel have been produced worldwide of which China’s share takes about 49.5 percent (803.8 million MT) into account. Unlike the development of the steel production output in the world and its significant reduction in 2009 as an effect of the global financial crisis, the Chinese steel production has grown during the years 2008 to 2014.

In 2015, the output of crude steel in China has fallen to about 803.8 million MT which equals -2.3 percent compared to 2014 (World Steel Association, 2016b). Roberts (2012, p. 12) describes this because of a slower performance in the major steel consuming industries. Besides this, the government is constantly shutting down low-performing facilities, by consolidating them by means of M&As (Metal Center News, 2015) or by forcing them to close (Roberts, 2012, p. 13).

The strategy to merge diverse facilities has formed huge steel groups dominating domestic and global markets. They are technologically advanced to produce more high-class products than before because of next-generation manufacturing facilities (Markham, 2012, p. 35). However, there was an estimated number of 2,700 steel mills in 2012 many of which produce lower-valued products and therefore these objects are considered to be consolidated (Roberts, 2012, p. 13). The central Chinese government is strongly involved because the steel industry’s performance has a impact on unemployment and social stability (Brizendine & Oliver, 2001, p. 22). On the one hand, the central government pushes to consolidate, on the other hand, local governments set other priorities, mainly to ensure tax revenue and prevent lay-offs. As the state officials’ promotions tend to base on their regions’ economic performance, the willingness to close down facilities or merge them is lower (Roberts, 2016, p. 21).

The NDRC has “… approved $23 billion in new steel projects …” (Roberts, 2012, p. 13) in 2012 and the twelfth FYP aim to develop “… 36 million units of affordable housing” (KPMG, 2011b, p. 2) until the end of the FYP in 2015. Both steps keep domestic demand on a high level and prevent overcapacity, which is estimated to be up to 300 million MT (Metal Center News, 2015).

2.3 China’s steel industry export figures

Overcapacity reduces the profitability and thus export is a possible solution to stay profitable. Export appears to be more attractive to most companies than M&As, which are cost-intense for steel companies that are generally lacking in funds (Roberts, 2012, p. 12f). As shown below, China’s steel industry has increased its export during the past years.

Abbildung in dieser Leseprobe nicht enthalten

Figure 2: Imports and exports of semi-finished and finished steel products in China from 2005 - 2014 based on (World Steel Association, 2015a, pp. 53-58)

Figure 2 presents China’s annual imports and exports of semi-finished and finished steel products in million MT from 2005 to 2014. In 2014, steel exports accounted for 92.9 million MT and in 2015, the number rose to 112.4 million MT showing an annual growth rate of about 20 percent (American Metal Market, 2016). At the same time, imports decreased since 2009 and then remained constant on a constant level of 15 million MT since 2012 as pictured in Figure 2. The decrease in imports is due to the advanced capability of the domestic steel industry to produce a wider range of more processed products than in the years before (Roberts, 2012, p. 13). Following the drop in imports and exports in 2009 because of the financial crisis the export rate first grew slower and then accelerated from 2013 to 2014 and on to 2015. Between the years 2009 and 2013 the Chinese government had emphasized to put stronger focus on domestic growth rather than on exports. However, already in 2012, Thomas Gibson, CEO of the American Iron and Steel Institute (AISI) mentioned his concerns about the Chinese government boosting the steel industry, by means of massive subsidies to steel and steel-related STEs. Another competitive advantage is the undervalued Chinese currency (Markham, 2012, p. 34). This could be a possible reason for highly increased export rates in 2014 and 2015.

[...]


1 Crude steel is defined as “steel in the first solid state after melting, suitable for further processing or for sale. Synonymous with raw steel.” (ArcelorMittal, 2016)

2 Also called „Steel Industry Development Policy“

Excerpt out of 20 pages

Details

Title
Explaining Growth in China
Subtitle
Consequences of Steel Tariffs on the Chinese Steel Industry
College
The FOM University of Applied Sciences, Hamburg
Grade
1,0
Author
Year
2016
Pages
20
Catalog Number
V536582
ISBN (eBook)
9783346130266
Language
English
Tags
Economics, Explaining Growth in China, Hausarbeit, Assignment, FOM, FOM Assignment, FOM Hamburg, China, Stahlindustrie, Chinese steel industry, global steel price, steel price, Tariffs, Zölle, Chinese steel exports, Volkswirtschaft, Seminararbeit, steel industry, Wirtschaftsboom, Wirtschaftswunder, Jahresplan, Taxing, overcapacity, Überproduktion, overemployment, global market, governmental policies, domestic market, export, steel sector, restructuring, steel group, oversupply, Volkswirtschaftslehre, FOM Hausarbeit, MBA, Master of Business Administration
Quote paper
Florian Beyer (Author), 2016, Explaining Growth in China, Munich, GRIN Verlag, https://www.grin.com/document/536582

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