In late 2008 China was facing European Union dumping charges in the World Trade Organization on steel products. This coincided with the onset of the global financial crisis and subsequent recession and the hurried preparation of Beijing’s massive stimulus package.
In Beijing, discussions also addressed the role of steel in China’s stimulus package, and a proposal to establish a 5 million tonne steel stockpile. By the end of 2008, the 5 million tonne estimate jumped to 15 million tonnes.
China’s steel industry, however, had to face the question of the viability of such a stockpile. A small stockpile will have no effect on the market. If the stockpile is too large, the cost will be prohibitive.
Using December 2008 prices for hot-rolled sheet, a 15 million tonne stockpile would cost about US$8 billion. There was also the unresolved question as to who would underwrite the cost of producing and maintaining the stockpile.
Plagued with inefficiencies, excess labour, rising costs, profiteering by the traders and mounting complaints in the WTO, China’s steel industry needed a serious price advantage over its competition to increase market share. An increase in subsidies would lead to more complaints, rising off-balance sheet expenditure and rocketing bank loans.
China aims to increase market share to keep its steel industries turning over and making substantial profits. The reason is elementary: to cover the job losses caused by the restructuring of China’s highly polluting, government subsidised, and inefficient steel industry.
The solution appeared simple. Delay the price negotiations until June 30, 2009, force a major reduction in the price of iron ore and secure a strategic advantage over Japan and South Korea.
By the end of June, the negotiating consortium of China’s state steel majors failed to secure the huge cut demanded by China. The signing of new contracts accepting a 33 per cent price cut by Japan and South Korea weakened China’s negotiating position. China demanded a minimum 40 per cent cut.
Beijing had been aggressively denouncing the miners in Chinese and international media, highlighting its hardline “no surrender” policy. The situation then became highly politicised. Beijing took over the lead role in the China Iron and Steel Association, replacing the industry majors as the negotiating authority. In effect, the miners would now be dealing directly with the Chinese Government.
The objective was to use political muscle to force the issue and secure the 40 per cent cut. If countries like Australia wanted to retain China’s trade and goodwill, it should “convince” the miners to meet Beijing’s demands. China’s media dutifully kept its government hard line stand in the headlines.
Contradictions and disunity
A flow of official data from the Chinese Government was confirming that China’s steel industry was in fact showing strong growth and importing record iron ore shipments, and was giving the stimulus package all the credit. Steel was also a major contributor to local GDP growth.
Regional state media, however, was contradicting this position with reports of oversupply, mounting stockpiles, and rising losses.
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