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Analysis: Global steel glut feeds trade skirmishes
NEW YORK/LONDON |
NEW YORK/LONDON (Reuters) - Steel producers from around the world are trading allegations that rivals are dumping cheap metal on the market, threatening to trigger a series of mini-trade wars.
A darkening outlook for the world economy has led to over-capacity in the steel industry, unleashing beggar-thy-neighbor sales at below production cost from Texas to Thailand, some executives say. Sanctions on Iran and the lack of a recovery in demand from Middle East nations after the Arab Spring, have worsened the strain, cutting off key import markets.
And this time it isn't just China that is being cast as the villain. Russia and Ukraine are both being blamed, reviving a long-simmering source of trade friction.
The global steel industry is already hunkering down for a fresh round of closures and trade disputes.
U.S. measures implemented over a decade ago to prevent Russia dumping hot-rolled coil, used in appliances and autos, are under review by the U.S. government's Commerce Department. One major steel trader has already quit importing Russian-produced coil into the United States for fear any deals may be scuppered by U.S. trade action.
"The scenario that caused (previous) trade crises is back," Alan Price, head of the international trade practice at law firm Wiley Rein LLP, said in an interview.
In particular, he said, the trouble stems from foreign producers who enjoy government subsidies keeping output high even as prices fall, flooding the market with cheap metal.
Some years ago, the culprit was China. Indeed, Chinese shipments to the United States have surged by two-thirds so far this year, but Washington has already imposed a string of punitive anti-dumping duties on many of its steel imports.
Moreover it isn't just developed markets that are suffering. The pain is also being shared more widely, with developing nations and territories like Turkey, Thailand and Taiwan, struggling with plunging prices and blaming cheap imports, according to executives.
Australia's largest steel maker, Bluescope Steel (BSL.AX), has launched an anti-dumping lawsuit this week against imported hot-rolled coil from Japan, Taiwan, South Korea and Malaysia, chief executive officer Paul O'Malley told Reuters on Tuesday.
To be sure, the lower prices and cut-throat competition are, for now at least, good news for steel consumers, such as auto and appliance makers, as well as construction companies. But if the friction leads to trade battles they can also get caught up in any retaliatory trade measures by countries who feel they have been wronged.
China, which is both the world's largest steel consumer and producer, has imposed its own duties on U.S. exports of a specialty steel product known as grain-oriented electrical steel, and last month initiated a trade complaint at the World Trade Organization against U.S. import duties on 22 Chinese products that range from solar panels to kitchen shelving.
IRAN LOSS KEY
Competition among global steel producers has intensified just as demand has weakened.
Tighter U.S. and European Union sanctions on Iran at the start of the year removed a major steel buyer from the market, dealing the already-ailing industry another blow.
Iran last year imported 4 percent of the total 51.8 million tons of hot-rolled coil traded across the globe, according to the International Steel Statistics Bureau (ISSB), up from just 1.4 percent in 2008. Russia provided some 63 percent of the 2011 imports, double its share four years earlier, the data shows.
Exports to other key buyers in the region, including Egypt and Libya collapsed, last year amid the turmoil of the Arab Spring protests, traders said. Demand hasn't recovered.
As a result, importers have had to search for alternative markets, raising alarm in the U.S.
"I believe the American mills are concerned that all these volumes that used to be allocated for other markets might be diverted into the U.S.," said Ugur Dalbeler, managing director of Colakoglu Metalurji, one of Turkey's largest steel producers.
Dollar strength and healthy demand have also made the United States a popular destination for importers. In the past year, energy companies raced to build pipelines and exploit shale gas and oil reserves; auto makers have been ramping up output again.
Importers have flooded the U.S. market with Russian hot-rolled coil priced below the going rate while still high enough to make a profit, traders said.
The Russia-dominated Commonwealth of Independent States (CIS), which as a region is the world's largest net exporter, can sell at cheap prices because it has the world's lowest production costs due to their access to plentiful raw material supplies.
But now the market is saturated, with some traders facing potential fire-sale deals for unsold metal. Hot-rolled coil prices in the U.S. have fallen 10 percent this month to $600 per short ton and are close to the cost of production, according to Peter Fish, managing director of steel consultancy MEPS.
"We're reaching a tipping point. It's not worth taking an order at these prices," he said in reference to U.S. steel mills.
Tensions with Russia have not been this high since the late 1990s when Russian steel deluged the U.S. market following the end of the Cold War, experts said.
That dispute was solved by a suspension agreement signed in July 1999 requiring Russia to sell hot-rolled coil into the United States based on a formula that set a minimum price and a quota system. The United States had threatened anti-dumping duties.
But the deal has become the central point of renewed friction between the two countries, with U.S. steel producer Nucor Corp (NUE.N) accusing Russia of suppressing and undercutting domestic prices.
Led by its Chief Executive Dan DiMicco, who is often the industry's front man for complaints about unfair pricing, the second-largest U.S. steel maker said reference prices using the formula have failed to keep pace with changes in U.S. prices.
In the preliminary results of its review in May, the Department of Commerce found that Russian prices are below the domestic market.
The reference price for Russian hot-rolled coil imports using the suspension agreement mechanism of $408.32 per ton for the second quarter was well below the going rate in the domestic market of $763 per ton in March, it said in a June 1 notice announcing the preliminary results.
The quarterly pricing formula either needs overhauling or the agreement will be terminated, it said. That would likely trigger a push by the domestic industry for anti-dumping duties.
Ahead of the deadline for a final ruling by the U.S. in September, Washington and Moscow are locked in negotiations and shipments have ground to a halt.
At least one large trading house has stopped buying Russian steel for import for fear of trade measures. "It's scary enough to scare a company like mine. It's got enough teeth and merit that we won't take the chance," said a senior trader at the firm.
As much as 40,000 tons of Russian hot-rolled coil is sitting unsold in Houston, the main port for steel imports, he said. "There's so much unsold steel, the port will sink," the trader joked.
But it isn't just the United States that has concerns.
"Many developing countries feel that their industries are being savaged by imports from other developing countries," said Frederick Waite, a trade attorney at Vorys, Sater, Seymour and Pease LLP.
Taiwan's largest steelmaker, China Steel Corp (2002.TW), said it believes the fiercest competition among importers is in Southeast Asia rather than the United States.
The company's chairman Jo Chi Tsou sounded the alarm about cheap slab and hot-rolled coil imports from Russia, Ukraine and Brazil, but also listed Japan and South Korea as increasingly desperate to offload material due to their weak home markets.
Iran's removal from the market was made particularly stark when even Turkey, often alleged to have dumped cheap steel into the United States, rounded on Russia and Ukraine for hurting domestic Turkish prices.
"Our regional competitors, Ukraine and Russia are having difficulties in other markets so they are trying to dump their production into Turkey," said Kemal Ozden, senior advisor to the chairman of Erdemir, Turkey's largest steel maker.
It is unclear if this war of words will escalate into an all-out trade dispute - countries would likely need to see damage for a prolonged period before taking action.
With prices plunging, the industry needs to get rid of the hefty stocks and excess capacity weighing on the market. ArcelorMittal is mulling more output cuts in Europe and traders expect producers to prolong summer maintenance, but analysts are skeptical that China or Russia will take similar action.
"It's difficult to get an international plan. The Chinese steel industry doesn't see any reason for cutting capacity drastically... You'll get the same situation in Russia (where) there's some state support," said Fish.
(Reporting by Josephine Mason and Silvia Antonioli; Editing by Martin Howell and Sofina Mirza-Reid)
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