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| Rising Chinese steel capacity a worry for other nations |
| Kunal Bose / Dec 08, 2009, 00:54 IST |
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The fall in steel prices in the wake of global economic meltdown has consigned many balance sheets of groups taking the metal in the red. The drop in demand in the final quarter of 2008 was so steep and steel product prices turned so uneconomic, particularly for high cost mills in western countries, that the industry in many regions was forced to switch off half the capacity.
The world steel scene now is not that dismal, though it remains far from being normal. The point will be illustrated by the fact that steel capacity use in the US has improved to over 60 per cent from about 50 per cent at this point last year. While rise in steel capacity use is resulting from better inquiries from manufacturing and construction sectors, what is also to be considered here is the simultaneous shrivelling of the US steel industry.
The Wall Street Journal says in a report that the quiet shrinking of steel capacity in the US is led by the world’s biggest steel group ArcelorMittal, which thinks “it can do more with less by running fewer plants at higher capacity.” ArcelorMittal closing down mills at Lackawana, N.Y. and Hennepin no doubt will help in stepping up capacity use at its other facilities leading to cost control.
But doing away with some capacity in the US instead of idling it till the market makes a robust recovery is part of the global strategy of ArcelorMittal. Lakshmi Mittal is on record saying that the US is not where growth is to come from and therefore, his group’s investments will be targeted at emerging markets. The goal for ArcelorMittal is to make half the steel in the developing world amounting to a rise of 10 perentage points in its share of total production in the next few years.
This will explain its tenacious pursuit of creating large steel capacity in India where the demand for the metal is growing at an annual rate of 9 per cent now but with the promise of clocking still higher consumption growth rate in future. The long struggle to acquire land and mine linkages has not dented ArcelorMittal resolve to build mega steel mills here. The company’s buying of 35 per cent of Uttam Galva is nothing more than getting a toehold in Indian steel sector.
As it is allowing its patience to be tested on its promised big investments in India, Mittal has announced plans to tie up with Brazilian miner Vale, the world’s biggest iron ore producer to build a steel mill costing $5 billion. He thinks Brazil’s growth prospects calls for investment commitments on a large scale now. ArcelorMittal has resumed operation of a laid off plant in Romania as it pursues capacity expansion in Ukraine and South Africa.
But will not ArcelorMittal’s ambitious growth plans further add to world steel overcapacity? Reports are China now sitting on capacity of 610 million tonnes will be commissioning another 50 million tonnes next year. A spokesperson for China Iron & Steel Association said at a recent conference in Beijing that the country would end the year with production of 565 million tonnes of crude steel. That will be a lot more than China’s domestic requirements, making the world, including India vulnerable to dumping. CISA is no doubt estimating domestic demand by several million tonnes extra at 549 million tonnes.
Experts say that the crying need for marginal, high cost and polluting mills in all places, particularly in China getting scrapped must have been an important consideration for the reconfiguration of ArcelorMittal strategy. A couple of years ahead of last Olympics, Beijing launched a campaign to weed out steel capacity existing in small fragments proving to be a drain on national resources. Simultaneously, it also wanted consolidation of vibrant capacity under a fewer heads.
But Chinese provincial authorities were found reluctant to dispose what Beijing very sensibly proposed. While many polluting mills bribed their way to remain in production, the Beijing move also got stymied as provincial bosses would not know how to find alternative jobs for the redundant steel workers. Loss of revenue for the local exchequer would also explain the provincial reluctance to close any mills.
In a new move to win over the provinces housing unwanted steel capacity, Beijing is working out a fiscal package which will see portions of tax revenues collected by it from steel industry go to regional governments. The transferred revenue will be for use by the provinces to mitigate the impact of mill closures.
Whatever tax reforms are introduced to placate regional satraps, it will be years before any significant steel capacity reduction and consolidation happens in China. The country’s past records in this direction does not inspire much confidence in the outside world.
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