China talks about reforming inefficient industry, then rolls out measures to support it

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Despite reports that it plans to take a broom through the sector to alleviate endemic overcapacity and mounting losses, China’s government threw a lifeline to its beleaguered steel industry.

Yesterday it announcing it will cut export tariffs on some steel products next year in an attempt to ease financial pressures on mills as demand within China continues to deteriorate.

The announcement, a somewhat strange response given all the recent chatter from the government has been around reducing overcapacity and efficiency in the sector, followed news earlier in the week that the nation’s net steel exports grew by only 1.1% year-on-year to 8.7 million tonnes in November.

Despite the sharp annual deceleration registered in November, between January to November Chinese net steel exports grew to 90.1 million tonnes, up an impressive 28% higher than the same period a year earlier.

Amidst weakening demand for steel domestically, China has been shipping inventories overseas, something that has helped to minimise growth in inventory levels. While effective in helping to keep growth in inventories in check, flooding international markets with cheap steel product clearly has its risks.

As Vivek Dhar and Kofi Mensa, commodity researchers at the CBA point out, “the move also increases the risks of trade friction with a number of countries who have voiced strong opposition to cheap Chinese steel exports”.

While reducing tariffs will help to reduce cost pressures on struggling Chinese steel mills, it places pressure on steel producers in other countries, raising the potential for political friction.

Dhar and Mensa believe the sharp slowdown in Chinese steel export growth in November reflects growing trade frictions across the Asian region.

“The slowdown in China‚Äôs net steel exports in November likely reflects growing trade frictions as a number of countries have responded to cheap Chinese steel exports,” said the pair.

“According to the South East Asian Iron & Steel Institute, more than 20 trade complaints have been lodged against Chinese steel exports, with seven cases stemming from Southeast Asia.”

Given high levels of indebtedness, weak demand and overcapacity throughout China’s steel industry, the move to reduce tariffs appears – on the surface – to be a desperate measure.

While there are other factors at hand – Chinese steelmakers employ great swathes of people and cannot be simply shuttered without social consequences – things are unlikely to improve as long as the government continues to offer incentives for inefficient and unneeded steel mills to remain in operation.

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