US steel trade bodies highlight over-subsidization in Chinese steel sector

By Paul Ploumis (ScrapMonster Author)

August 05, 2016 12:33:43 PM

SPOKANE (Scrap Monster): Five leading US steel trade associations have alleged that the Chinese steel industry is heavily subsidized by the government. In a report on market research into Chinese steel industry, the associations noted that the subsidies and market distorting policies by the Chinese administration has led to the rapid growth in steel production and exports. The report was prepared jointly by the American Iron and Steel Institute (AISI), the Steel Manufacturers Association (SMA), the Committee on Pipe and Tube Imports (CPTI), the Specialty Steel Industry of North America (SSINA) and the American Institute of Steel Construction (AISC).

According to the report, Chinese steel sector has witnessed tremendous growth over the past 20 years. The production in 2014 totaled over 822 million tons, accounting for 50% of the world’s total production. The preferential policies by the Chinese administration towards steel sector coupled with subsidies are being considered as the key growth drivers. This has not only resulted in enormous overcapacity, but also has led to the creation of a highly fragmented domestic steel sector made up of many weak, inefficient, and heavily polluting companies. The report also forecasts that the country’s steel capacity is expected to increase further in the short term as new production capacities come online.

The Chinese steel industry is found to the beneficiary of various supports from State including unconditional cash grants, equity infusions, preferential loans, land-use subsidies, raw material price controls and other subsidies for utilities. Following pressure from international steel producers and the WTO, the country has been forced to make certain adjustments to subsidies and preferential policies. But the industry is currently undergoing tremendous restructuring and is likely to result in enhanced production during the years to come. The Draft policy announced by the Chinese administration proposes to eliminate 80% of small, substandard steelmakers in the country and consolidate its ten biggest steel enterprises.

For instance, Hebei Steel Group has reportedly received a total of RMB71 million in governmental subsidies in 2014, in addition to RMB15 million as deferred subsidies. Ansteel Group has received total government subsidies amounting to RMB385 million during the year. Shougang Group received a total of RMB655 million in subsidies from the government in 2014, in addition to deferred subsidies amounting to RMB935 million. Also RMB 386 million in subsidies was granted to Valin Steel Group during the year.

Despite steadfast support from the government, Chinese steel enterprises have reported high levels of debt. The 86 large and medium-sized steel enterprises across the nation had reported a total debt of RMB 3 trillion by the end of 2013. This included RMB 1.3 trillion in bank loans. The entire steel industry had a debt ratio of 69.347%, which was very close to the critical line of 70% above which banks generally do not provide lending. As many as 35 steel companies had deficits, some with losses reaching 40%. It is suspected that subsidies and preferential policies have created inefficiencies in the industry.

In releasing the report, the steel trade associations urged that China should not be granted market economy status in December. They also expressed the hope that the findings of the report be used to further advance the dialogue among various nations on elimination of excess steel capacity.